Group Members Kishan Gupta Aditi Gupta Harshit Gupta Dhiraj Dubey (72) (71) (70) (69



Sr. No.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Background of Retail industry Company Profile of Pantaloon Retail Ltd. Market share & Competitors Long-term Solvency Ratio Observation, Analysis & Recommendation for Long-term Solvency Ratio Short-term Solvency Ratio Observation, Analysis & Recommendation for Short-term Solvency Ratio Market Ratio Observation, Analysis & Recommendation for Market Ratio Profitability Ratio Observation, Analysis & Recommendation for Profitability Ratio Future Prospects Reference


Page no.
3 4 4 6 7 8 9 10 11 12 13 14 16


Background of Retail Industry The Indian retail industry is divided into organised and unorganised sectors. Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/ beedi shops, convenience stores, hand cart and pavement vendors, etc. India¶s retail sector is wearing new clothes and with a three-year compounded annual growth rate of 46.64 %, retail is the fastest growing sector in the Indian economy. Traditional markets are making way for new formats such as departmental stores, hypermarkets, supermarkets and specialty stores. Western-style malls have begun appearing in metros and second-rung cities alike, introducing the Indian consumer to an unparalleled shopping experience. The Indian retail sector is highly fragmented with 97 % of its business being run by the unorganized retailers like the traditional family run stores and corner stores. The organized retail however is at a very nascent stage though attempts are being made to increase its proportion to 9-10 % by the year 2010 bringing in a huge opportunity for prospective new players. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 % of India¶s GDP. Comparative Penetration of Organised Retail

For analysis purpose, we would like to choose Pantaloon Retail Ltd as our analysis subject because the organization is leading retailer of India.


Pantaloon Retail Ltd. - An Introduction Pantaloon Retail (India) Limited, is India¶s leading retailer that operates multiple retail formats in both the value and lifestyle segment of the Indian consumer market. Headquartered in Mumbai, the company operates over 16 million square feet of retail space, has over 1000 stores across 73 cities in India and employs over 30,000 people. The company¶s leading formats include Pantaloons, a chain of fashion outlets, Big Bazaar, a uniquely Indian hypermarket chain, Food Bazaar, a supermarket chain, blends the look, touch and feel of Indian bazaars with aspects of modern retail like choice, convenience and quality and Central, a chain of seamless destination malls. Some of its other formats include Brand Factory, Blue Sky, aLL, Top 10 and Star and Sitara. The company also operates an online portal, Future Value Retail Limited is a wholly owned subsidiary of Pantaloon Retail (India) Limited. This entity has been created keeping in mind the growth and the current size of the company¶s value retail business, led by its format divisions, Big Bazaar and Food Bazaar. The company operates 120 Big Bazaar stores, 170 Food Bazaar stores, among other formats, in over 70 cities across the country, covering an operational retail space of over 6 million square feet. As a focussed entity driving the growth of the group's value retail business, Future Value Retail Limited will continue to deliver more value to its customers, supply partners, stakeholders and communities across the country and shape the growth of modern retail in India. Pantaloon Retail is the flagship company of Future Group, a business group catering to the entire Indian consumption space. The list of its competitors are as follows:
1. Vivek Limited Retail 2. PGC Retail 3. REI AGRO LTD Retail 4. RPG Retail Subhiksha 5. Spencer¶s 6. Pantaloon Retail 7. Marks & Spencer 8. The Tata Group 9. K Raheja Corp Group 10. Lifestyle International 4

11. Pyramid Retail 12. Subhiksha 13. Trinethra 14. Vishal Retail Group 15. BPCL 16. Reliance Retail 17. Reliance ADAG Retail 18. German Metro 19. Shoprite Holdings 20. Paritala stores bazar 21. Aditya Birla Group 22. Kapas 23. Nilgiri¶s

The market share of top 5 retail companies of India may be specified as follows :

Sr. no.
1. 2. 3. 4. 5.


Share (US bn dollars )
444 133 80 53 44

Future Group (Pantaloon) Shoppers Stop Landmark (Lifestyle) Trent Subhiksha


Long-term Solvency Ratios Sr. no. 1. Determining Ratios Jun¶09 Jun¶10

Interest Coverage ratio = PBIT/Annual Interest Payment

1.68 times

1.46 times

2. 3.

Interest coverage on cash basis Debt Service Coverage ratio = PBIT/(Annual Interest Payment + Principal Repayment)

2.12 times 0.16 times

2.26 times 0.26 times

4. 5.

Debt/ Equity ratio ROI ratio =(PBIT/ Total capital employed)*100

74.88:1 10.42% P/S

33.61:1 10.59% P/S


ROE ratio =[(PAT-Preference dividend)/ Equity shareholder¶s fund] * 100

3.69 P/S

4.35 P/S


Interest rate (%) = (Interest amount/ Debt) * 100




Tax rate (%) = [Tax amount/(PBIT- Interest)] * 100




Observation & Analysis: y In both the years, the company¶s Interest Coverage ratio was not upto the mark but Interest coverage ratio on the cash basis was good with 2.12 times in June¶09 & 2.26 times in June¶10 which implies that the company is in the position to pay the interest & principal amount. On the other hand, the company¶s debt is quite high in both the years.


Recommendations: y The company should raise more equity & should reduce the debt burden. This will reduce interest rate amount. The company should look upon the debt which carries lower coupon rate.



Short-term Solvency Ratio Sr. no. 1. Determining Ratios Jun¶09 Jun¶10

Current Ratio = Current asset/ Current liabilities




Quick Ratio = (Current assets- Inventory-Prepaid expenses)/ (Current liabilities- Bank O/D)




Inventory Turnover Ratio = Cost of goods sold/ Average inventory

3.72 times

4.9 times


Inventory Turnover (in days) = 365/Inventory turnover ratio

98 days

74 days


Debtors Turnover Ratio = Credit Sales/ Average Receivable

37.63 times

51 times


Debtors Turnover (in days) = 365/ Debtors turnover ratio

9 days

7 days


Cash Ratio = (Cash + Marketable Securities)/ Current liabilities




Capital Turnover Ratio = Sales/ Capital invested




Observation & Analysis: y The company is facing severe liquidity crunch in the company as the current ratio has come down from 2:1 to 1.5:1 in the year 2010. Also the company¶s quick ratio is quite low at 0.2:1. However, the company¶s inventory turnover ratio has come down from 98 days to 74 days but is still not sufficient to put risk on short-term solvency of the company. Debtor turnover ratio is quite good as debt collection period is just 7 days. Cash ratio is not upto the mark as the company doesn¶t have hard cash to meet its obligations.


y y

Recommendations: y The company should reduce the inventory turnover ratio to have cash in hand to meet short-term obligation. Cash ratio should be increased.



Market Ratios Sr. no. 1. EPS = (NPAT- Preference dividend)/ Number of Equity shares 2. Dividend per share = Dividend declared/ Number of Equity shares 3. Dividend payout ratio = (DPS/ EPS) * 100 4. Earning yield = (EPS/ MPS) * 100 5. P/E ratio = MPS/ EPS 6. Book value per share = Net worth/ Number of Equity shares 7. Price to book value ratio = MPS/ Book value per share 3.15 5.14 Rs. 58.08 P/S Rs. 61.29 P/S 49.55 72.10 2.01% P/S 1.38% P/S 8.20% P/S 9.52% P/S 0.303 P/S 0.415 P/S Determining Ratios June¶09 June¶10

3.693 P/S

4.355 P/S


Analysis & Observation: y Market has not given a good response to the company in both the years as the P/E ratio in both the years was quite high which reflects that the stock is risky but P/B ratio in both the years was high which reflects a good future prospect. However the EPS of the company in June¶09 was Rs. 3.693 P/S & in June¶10, it was Rs. 4.355 P/S. The company¶s dividend payout ratio was also low at 8.20% P/S & 9.52% P/S in both the years i.e. June¶09 & June¶10 respectively. Earning yield was also low as compared to the previous year.



Recommendations: y They need to maximize more returns to the shareholders.


Profitability Ratios Sr. no. 1. Gross Profit ratio = (Gross Profit/ Net Sales) * 100 2. Net Profit ratio = (Net Profit/ Net Sales) * 100 3. ROI = (PBIT/ Total Capital employed) * 100 4. ROE = [(PAT ± Preference dividend)/ Equity Shareholder¶s fund] * 100 5. Interest rate (%) = (Interest amount*100)/ Total debt 11.12% 21.57% 3.69% P/S 4.35% P/S 10.42% P/S 10.59% P/S 2. 11 2.84 Determining Ratios June¶09 10.09 June¶10 9.50


Observation & Analysis: y The company is highly geared as the risk in the company is quite high & the return on the equity is very low of 3.69 P/S in June¶09 & 4.35% in June¶10 as compared to the ROI of 10.42% P/S in June¶09 & 10.59% P/S in June¶10. It is because of the following reasons: The company¶s debt is very high in the proportion to the equity. The company is paying high rate of interest on the capital borrowed & the tax. Recommendation: y The company should raise more equity & should reduce the debt burden. This will reduce interest rate amount. The company should look upon the debt which carries lower coupon rate. 



Pantaloon Future Prospects In January this year, Pantaloon Retail had announced its intentions of skim off four of its business entities - which also include Big Bazaar and Food Bazaar - into sovereign ancillaries, thereby keeping open their future prospects of being listed independently. According to a Pantaloon Retail a regulatory filing to the stock exchanges last week, the agenda of the proposed board meeting was to deliberate upon the restructuring of its business, "by realigning the business lines as per verticals and considering to create separate legal entities for the same." The filing also added that, at the meeting, the board of the company would also reflect on the issuance of securities - including issuing shares or warrants, on preferential basis to potential promoters or investors along with thinking about "changing the name of the company in view of its new structure." Expansion, robust demand improve Pantaloon retail's prospects Rising consumption, reflected in higher same store sales, focus on core retail operations and attractive valuations should help the stock deliver 30 % over 18 months, say analysts. While Pantaloon Retail's stock delivered negative returns in 2010 (down 13.6 %) as compared to the Sensex's 17 %, this trend should change soon for the better. Analysts believe the current restructuring exercise to focus on retail, streamlining of operations and strong growth should help the stock generate about 30 % returns over the next 18 months. India's largest listed retailer, Pantaloon, is expected to record a sales growth of 20-25 % over the next two years on the back of aggressive expansion as well as a robust same store sales growth. The company is also planning to team up with Carrefour, the world's second largest retailer after Walmart, to set up the latter's branded stores in India. The tie-up would assume importance when foreign direct investment (FDI) in multi brand retail is allowed as it will give the company an opportunity to divest a part of its stake in the retail business in favour of a foreign player. Expansion, sales growth, profitability The company which currently operates about 16 million square feet of space is expected to add about 1.5 million to 2 million square feet of retailing space annually over the next two years. On the back of capacity addition as well as strong same store sales growth across formats (value, lifestyle and home), the company expects to grow its sales by 25-30 % in 2010-11. Good growth, especially in the lifestyle brands which have EBITDA margins of 1213 % as compared to value brands which command half of that, higher private label (own brands) sales as well as benefits of scale should keep margins stable going ahead even as the company invests in expanding its reach.


Further, its plans to improve inventory turnover (inventory forms 60 % of its current assets) will lead to lower working capital requirements and dependence on debt to fund operations. Part of this inventory reduction (inventory outstanding days are expected to be reduced by 30 % over the next 2-3 years, says an Antique Stock Broking report) is likely to come from the company's increased focus on food items. The sales cycle for these products, which are expected to contribute to 50 % of the sales over the next five years compared to 35 % currently, is shorter. Restructuring Pantaloon Retail has been undertaking a number of steps to renew its focus on its core retail operations which comprise value and lifestyle segments. The company has already demerged its mall management business into a separate company, Future Mall Management, which will manage its property leasing and food services business. Further, the company plans to restructure its financial services businesses by consolidating Future Capital Holdings (a listed company) and the insurance business into a single entity, which should help it to free up funds for its core retail operations. Analysts believe the restructuring process will be completed by 2011-12, and should rub off positively on the stock valuations. Outlook The completion of the restructuring process and the company's focus on its core retail operations will help it improve the cash flow and profits. The concern area will continue to be its home business, which posted a loss of Rs 12 crore on revenues of Rs 200 crore in the September quarter. The company says it has received orders from institutional customers and combined with the growth in retail business should translate into higher sales over the next few quarters. Further, the EBITDA margins, which fell 120 basis points year-onyear in the September quarter to 8.2 %, are expected to stabilise in the December quarter which would see the full impact of the festival season. At Rs 332, based on the 2011-12 numbers, the stock is trading at an attractive 17 times the earnings. Even on a price to book value basis, valuations at 2.15 times are also lower than the historical four times. While Edelweiss Securities has a 'buy' rating on the stock, UBS and Antique Broking have targets ranging Rs 473-600


Reference: CMIE


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