ICICIdirect Pantaloons Retail Coverage

December 8, 2009 | Retail
Initiating Coverage
Pantaloon Retail India (PANRET)

Size matters
Pantaloon Retail, the leading retailer of India, is expected to see a twofold rise in retail space to reach 17.8 million sq ft by FY12E from 9.6 million sq ft in FY09. Catering to 60% of the wallet share, the company is in a sweet spot to leverage its massive retail space under operation. PRILs dominance in the value retail segment capitalises on the attractive demographic profile of the country. Its business realignment would create a pure retail play enhancing the value of its shareholders. We are initiating coverage on the stock with a STRONG BUY rating.
Current Price Rs. 350 Potential upside 21.4 %
Target Price Rs. 425 Time Frame 12-15 months
STRONG BUY
Analysts Name Bharat Chhoda bharat.chhoda@icicisecurities.com Prerna Jhunjhunwala prerna.jhunjhunwala@icicisecurities.com Jehangir Master jehangir.master@icicisecurities.com Sales & EPS trend
14000 12000 10000 8000 6000 4000 2000 0 25 20 15 10 5 0 FY08 FY09 FY10E FY11E FY12E Sales (Rs. Crore) (LHS) Diluted EPS (Rs.)
Aggressive space rollout to spur revenue growth

On a standalone basis, the retail space under operation is expected to reach 17.8 million sq ft in FY12E from 9.6 million sq ft in FY09. We expect the total revenue to grow at a CAGR of 25.3% driven by space expansion (22.6%CAGR) and higher revenue psf (1.9% CAGR).
Restructuring to create a pure retail play

PRIL is restructuring its entire business to hive off non-retail businesses and create a pure retail play for its shareholders. Value unlocking in non-retail businesses would generate cash for expansion of retail businesses easing pressure of raising debt.
Profitable growth the focal point

The profitability of the company is expected to improve, going forward, due to higher share of the lifestyle segment and private labels, cost reduction measures, economies of scale and implementation of better technology systems. The operating profit margin and net profit margin is expected to increase to 11% and 3% in FY12E from 10.5% and 2.2% in FY09, respectively.
Stock Metrics
Bloomberg Code Reuters Code Face Value (Rs) Promoter's Holding Market Cap (Rs Cr) 52 week H/L Sensex Average Volumes PF IN PART.BO 2 49% 6658 371/105 16983 182358
Valuations
We are positive on the business model of the company and believe the focus on profitable growth by the management would create value for shareholders. We value the company on an SOTP basis at Rs 9758.4 crore translating into Rs 425 per share. The CMP of Rs 350 per share does not even cover the core retail value of the company of Rs 370 per share making it an attractive investment. At the target price of Rs 425, the stock is trading at 29.2x and 22.2x its FY11E and FY12E earnings, respectively, providing a potential upside of 21.4%. Exhibit 1: Key Financials
Year to June 30 Net Profit Adj. Net Profit Shares in issue (crore) Diluted EPS (Rs) P/E (Adj.)(x) Price/Book (x) EV/EBIDTA RoNW (%) RoCE (%) FY08 126.0 125.9 15.9 6.5 44.3 3.2 16.5 8.6 11.8 FY09 140.6 140.6 17.4 7.2 43.4 2.8 13.1 6.8 11.7 FY10E 271.3 206.3 19.0 13.9 28.2 2.3 11.2 10.4 12.0 FY11E 284.1 284.1 19.5 14.6 24.1 2.1 9.5 9.1 13.1 FY12E 373.2 373.2 19.5 19.1 18.3 1.9 8.1 10.7 14.3
Comparative return metrics

Pantaloon Retail Shoppers Stop Trent Titan Vishal Retail 3M 13.2 33.6 52.8 9.1 3.4 6M 13.4 78.2 61.5 14.0 -29.4 12M 69.4 90 223.6 62.6 -22.9
Price Trend (Rs)

Target Price Absolute Buy
400 300 200 100 0 Nov-08 May-09 Mar-09 Jan-09 Jul-09 Aug-09
Source: Company, ICICIdirect.com Research
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Oct-09
Company Background
Pantaloon Retail India (PRIL), the flagship company of the Future Group, is Indias leading retailer operating multiple formats in the value and lifestyle segment of the retail sector. It operates approximately 9.6 million sq ft of retail space with over 1000 stores across 73 cities in the country. The leading formats of the company are Pantaloons (department store), Big Bazaar (hypermarket), Food Bazaar (supermarket) and Central (seamless mall). Hometown is the large size format of the company in the home furnishing segment, operated through Home Solutions Retail. PRIL is a one-stop solution provider for services in the consumption sector including logistics (3PL services), media (OOH and retail destinations), insurance (JV with Generali) and consumer finance (future money card) among others.
Shareholding pattern (Q1FY10)

Promoters Institutional Investors Other Investors Public % Holding 49 34 10 6
Promoter & Institutional holding trend (%)

60 50 40 30 20 10 0 Q2 FY09 Q3 FY09 Promoters Q4 FY09 Q1 FY10 Institutional 46.5 35.6 46.5 34.3 48.8 32.8 48.8 34.3
Exhibit 2: Business Structure

Pantaloon Retail India
Standalone Core Retailing
Subsidiaries Retail and allied services
Joint Venture Specialty Retail
Lifestyle Pantaloons 46 stores Central 10 stores Brand Factory 8 stores
Value Big Bazaar 117 stores Food Bazaar 38 standalone stores
Home Solutions Retail (66.9% stake) Retailing home products Future Capital Holdings (54.8% stake) Advisory & Consumer Finance Future Logistics (94.2% stake) 3PL & 4PL services Future Media (84.2% stake) Creation of media properties Future Bazaar India (99.74% stake) E-Tailing Future Brands (76.3% stake) Pantaloon Future Ventures (100% stake) Future Agrovet (96.2% stake)
Staples Future Office Products (37.50% stake) Staples Talwalkar Pantaloon Fitness Pvt (50% stake) Health and Beauty Future Axiom (49% stake) Distribution of mobile handsets Future Generali India Insurance Co. (25.5% stake) Future Generali India Life Insurance Co. (25.5% stake)
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Investment Rationale
Aggressive expansion to fuel growth Organised retail to grow at 25% CAGR
Retailing in India is highly fragmented and the organised retail segment is at a nascent stage. India has the highest density of retail outlets in the world. According to KSA Technopak estimates, the retail industry is expected to grow from US$410 billion in 2008 to US$755 billion in 2018P, a CAGR of 6.3% over the period. During this period, the penetration of organised retail is estimated to increase from 4.4% in 2008 to 22.5% in 2018P. Consequently, the organised retail segment is expected to grow from US$18 billion in 2008 to US$170 billion in 2018, a CAGR of 25%. Exhibit 3: Rising penetration of organised retail
800 700 600
US$ Bn
Organised retail penetration will reach 22.5% in 2018 from 4.4% in 2008
755 535 410 280 13.6 22.5
25 20 15 10 5
%
500 400 300 200 100 0 2.9 2003
4.4 2008 Retail (LHS) 2013P Penetration (RHS) 2018P
Source: KSA Technopak, ICICIdirect.com Research
PRIL retail space to grow at 22.6%CAGR

Organised retail was at a very nascent stage when PRIL entered the business in 1997. To create a leadership position in the sector and gain from first mover advantage, it expanded aggressively over the past five years to increase its retail space from 1 million sq ft in FY04 to 9.6 million sq ft in FY09, a CAGR of 75%. Even after such a massive expansion, we believe PRIL will be able to expand further as the retail pie is increasing with rising penetration of organised retail. We expect the retail space of PRIL to reach 17.8 million sq ft in FY12E from 9.6 million sq ft in FY09, a CAGR of 22.6%. Exhibit 4: Retail space to ~ double in next 3 years
18.0 16.0 14.0 12.0 Mn sq ft 10.0 8.0 6.0 4.0 2.0 0.0
2.8 7.9 5.1 9.6 12.2 14.7 17.8
FY06
FY07
FY08
FY09
FY10E
FY11E
FY12E
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This growth has been driven by the massive expansion undertaken in the Big Bazaar format. Though the contribution of Big Bazaar in the total space is expected to decline to 58.7% in FY12E from 64.1% in FY09, it would be a key growth driver for the company due to its large size and increased preference of consumers for value retail formats. The company also launched the seamless mall format, Central, with an average store size of 120,000 sq ft. The share of Central in the total space is expected to increase sharply from 13.2% in FY09 to 19.3% in FY12E on the back of aggressive expansion driven by best profitability delivered by this format (EBITDA margin ~23% in FY09). Exhibit 5: Format-wise space till FY12E
FY12E FY11E FY10E 1.7 1.5 1.4 6.2 5.0 7.4 8.7 0.3 10.4 0.4 0.4 2.7 3.4 1.0 0.5 1.2 0.6
Exhibit 6: Format-wise contribution to total space

100 80 60 % 40 20 0 12.3 FY09 Pantaloon Big Bazaar 11.2 FY10E Food Bazaar Central 10.5 FY11E Brand Factory 9.7 FY12E Others 64.1 61.1 59.0 58.7 3.4 4.2 13.2 2.8 3.3 5.6 16.3 2.5 3.3 6.5 18.4 2.4 3.1 6.9 19.3 2.2
2.0 0.7 0.4
FY09 1.2 FY08 1.0 FY07 0.7 0
0.3 1.3 0.4 0.3 0.3 0.9 0.3 0.2
3.1 0.20.60.3 0.2 2 4 Big Bazaar 6 8 Food Bazaar 10 Central 12 14 Brand Factory 16 Others 18
Mn sq ft Pantaloon
Value retail to retain major share Value retail a preferred format in India
Value retailing includes stores offering quality merchandise at a discounted price. Indias major population currently is and in future is expected to be in the middle class income group. This group, by nature, prefers value retailing formats like hypermarkets, supermarkets, discount and convenience stores. Since value retail stores serve as a one-stop shop for customers, it is more convenient, wallet friendly and time saving for this working group to purchase products at these stores. In a survey conducted by KPMG, respondents chose value retailing formats like supermarkets, hypermarkets, discount stores, etc to have the most potential for growth in the Indian market. Exhibit 7: Increasing preference for value retail formats
E-tailing Convenience Department Stores Discount Hypermarkets Supermarkets Speciality
9 9 18
respondents could choose more than 1 format
27 36 45 45 0 10 20 30 40 50
Source: KPMG India Retail Survey 2005, ICICIdirect.com Research
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Big Bazaar, Food Bazaar to maintain its dominance

Since value retail is a preferred format in India, PRIL focused on formats catering to this segment. It launched Big Bazaar and Food Bazaar and expanded the formats aggressively in major eight cities of the country with favourable demographics namely Ahmedabad, Bangalore, Hyderabad, Kolkata, Mumbai, Pune, Delhi NCR and Chennai. The two formats increased their share over the years to reach 71.5% of retail sales in FY09. However, since these formats have already reached a critical mass in the major cities, we believe the expansion of these formats is likely to be lower than the overall space growth of the company. We expect the retail space under Big Bazaar and Food Bazaar to reach 10.4 million sq ft and Food Bazaar to reach 0.4 million sq ft by FY12E. This equates to a CAGR of 19% for Big Bazaar and 13% for Food Bazaar over FY09-FY12E. Exhibit 8: Retail space under Big Bazaar and Food Bazaar formats
12 10 Mn sq ft 8 6 4 2 0 FY07 FY08 FY09 Big Bazaar
Big Bazaar and Food Bazaar with largest space under operations would be key drivers of growth
10.44 8.69 7.44 5.04 3.14 0.18 0.30 0.27 0.30 FY10E Food Bazaar 0.35 FY11E 0.40 FY12E 6.19
Despite this lower growth in value retail formats compared to the total retail space growth of 22.6% for the company, we expect Big Bazaar and Food Bazaar to maintain its dominance at 61.6% of retail sales in FY12E. We expect the retail sales of Big Bazaar to increase from Rs 4189.5 crore in FY09 to Rs. 7293.8 crore in FY12E, CAGR of 20.3%, driven by area addition (19% CAGR) and average revenue psf (1% CAGR). Major Food Bazaar stores are opened as cut-ins in the large format stores namely, Big Bazaar or Central. Hence, we expect minimal expansion in Food Bazaar on a standalone store basis. Consequently, we expect revenue from Food Bazaar to grow at 13.1% CAGR reaching Rs 457.1 crore in FY12E from Rs 316.3 crore, driven by 13.2% CAGR in space expansion. Exhibit 9: Big Bazaar format to grow at CAGR of 20.3% Exhibit 10: Food Bazaar format to grow at CAGR of 13.1%
9000 8000 7000 6000 5000 4000 3000 2000 1000 0 66.4 65.0 62.6 4189.5 3271.9 4994.6 6029.1 59.7 58.0 7293.8 68 66 64 62 60 58 56 7777.8 FY08 7405.0 FY09 7331.0 FY10E 7477.6 FY11E 7627.1 FY12E 54 52
% 14000 12000 10000 8000 6000 4000 2000 0 FY08 FY09 FY10E FY11E FY12E Sales (Rs Crore) Share in total retail sales (RHS) Avg Sales psf (Rs) 314.9 316.3 345.7 395.1 457.1 12358 12077 11975 12095 6.3 5.0 4.3 3.9 3.6 12216 7 6 5 4 3 2 1 0 %
Sales (Rs Crore) Share in total retail sales (RHS)
Avg Sales psf (Rs)
Source: Company, ICICIdirect.com Research Note: Food Bazaar stores do not include cut-ins in other larger stores
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Increasing focus on lifestyle stores Higher EBITDA margin in lifestyle stores to cushion margin pressure
While value retailing provides volumes on account of better bargains and lower ticket size, lifestyle stores provide a better shopping experience and branded quality merchandise. Consequently, operating margin in the lifestyle segment is higher than that in value retail segment. Hence, EBITDA margin in the lifestyle segment (Pantaloons, Central, Brand Factory and other formats) ranges between 2023% while that of the value segment ranges below 15%. The company is increasing its focus on lifestyle stores to create a balance between value and lifestyle retailing, thereby providing cushion to its operating margin. Exhibit 11: Format-wise EBITDA margin (FY09)
% 0 Pantaloon Big Bazaar Food Bazaar Central Brand Factory 21.3 6.7 22.6 10.7 5 10 15 20 19.0 25
Consequently the share of the lifestyle segment in total retail sales is expected to rise from 28.5% in FY09 to 38.4% in FY12E. The share of Pantaloons is expected to decline modestly whereas that of Central is expected to increase drastically. Due to lease model, the margin in the Central format is highest at 22.6% in FY09, attracting major investments in this format. The share of this format in total retail sales is expected to reach 19.5% in FY12E from 10.9% in FY09. Brand Factory is another lifestyle format, which is expected to gain further share in total retail sales at 6.1% in FY12E from 4% in FY09. Exhibit 12: Rise in share of lifestyle segment
100% 80% 60% 40% 20% 0% FY06 FY07 FY08 FY09 FY10E Value Segment FY11E FY12E 33.2 30.7 28.8 28.5 33.1 36.4 38.4 66.8 69.3 71.2 71.5 66.9 63.6 61.6
Central, with its highest EBITDA margin, is expected to grow fastest at 52.7% CAGR
Lifestyle stores
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Exhibit 13: Share of Central and Brand Factory formats in total retail sales
20 18 16 14 12 10 8 6 4 2 0 17.7 14.0 13.3 10.9 4.0 14.8 13.0 12.0 10.9 4.0 4.4 5.4 6.1 12.0 11.3 10.7 19.5
16.6 15.5
Central to gain maximum share, going forward
0.0 FY06
2.4
FY07
FY08 Pantaloon
FY09 Central
FY10E
FY11E
FY12E
Brand Factory
Rising share of private labels to improve margins

Private labels are the in-house brands created by a company. These labels are priced lower than national brands while having better margins. Over a decades presence, PRIL has created many private label brands that are sold under various formats like Pantaloons, Big Bazaar, Food Bazaar, Home Town, Brand Factory, E-zone, etc. The share of private labels is different for various segments operated by the company. Its share in the fashion and electronics segment is higher at 80% and 20%, respectively, while that in food and general merchandise is lower at 5-8%. According to the management, the share of private labels in the food and electronics segment is growing by approximately 100 bps annually. Exhibit 14: Private label brands
Product Category Apparel Men Women Uni sex Kids and Infants Consumer durables Air Conditioners Micro wave Ovens and Multimedia Home speakers Food Snacks, Cola and soft drinks g g Packaged tea Comodity food like Poha Packaged Pulses and Rice Home Care / General Merchandise Aluminum Foil and Baby Diapers Detergent Bars and scrubbers Kitchenware Bed and Bath Linen
Private Label Brand John Miller, F-Factor,Bare, Lombard Honey, Annabelle, Mix and Match Bare, RIG, Ajile, Akkriti Chalk, Bare 714
Gross Margin range 45- 60%
15 - 30% Koryo,SENSI Koryo 20 - 40% Tasty treat Fresh and Pure Ekta Premium Harvest 25 - 45% Caremate Cleanmate Dream Kitchen Dream Bed and Bath
PRIL is planning to expand the private label basket by launching new brands and including more categories, thereby improving margins
New launches and aggressive pricing in private labels is expected to increase its share in total sales of the specified categories. This further allows the company to negotiate better margins and terms with mainstream national brand players. Thus, apart from margin creation from private labels, better terms with national brands result in increased bargaining power for
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the company. Currently, private labels contribute 20% to the topline of the company, which according to the management is expected to reach 25%, going forward. With the increase in share of private labels, we expect the gross margin to improve by 80 bps to reach 30.9% in FY12E from 30.1% in FY09. Exhibit 15: Improving gross margin psf
2400 2350 2300 Rs psf 2250 2200 2150 2100 2050 2330 FY08 2189 FY09 2190 FY10E 2283 FY11E 2371 FY12E 30.4 30.3 30.1 30.7 30.9 31 31 31 30 30 30 30 30 % Gross Margin (%) (RHS)
Market Size US$ bn 2006 195.0 15.0 21.0 5.0 4.0 14.0 9.0 15.0 8.0 2.0 12.0 300.0 % Share Market Size 2006 US$ bn (2010) 65.0 256.0 5.0 23.0 7.0 33.0 2.0 7.0 1.0 7.0 5.0 24.0 3.0 16.0 5.0 24.0 3.0 12.0 0.6 3.0 4.0 23.0 100.0 427.0 % Growth (2005-10) 7.0 11.0 11.0 11.0 15.0 15.0 15.0 12.0 12.0 17.0 18.0 9.0 % Share Market Size (2010) US$ bn (2015) 60.0 342.0 5.0 35.0 8.0 50.0 2.0 11.0 2.0 12.0 6.0 43.0 4.0 28.0 6.0 37.0 3.0 21.0 1.0 7.0 5.0 53.0 100.0 637.0
Gross Margin psf (LHS)

Focus on food a big opportunity

Food and grocery is the largest vertical in the retail industry with 65% market share. However, its penetration into organised retail is only 1%. According to the National Sample Survey Organisation (NSSO) 60th round, 54% of the rural and 42% of the urban population expenditure was on food. This explains the tremendous growth opportunity for this vertical in the organised segment. Exhibit 16: Food to retain its highest share
Paticulars Food, Beverages and Tobacco Personal Care Apparel Footwear Furnishings IT & Consumer Durables Furniture Jewellery & Watches Medical Care & Health Services Recreation Others Total % Growth (2010-2015) 6.0 9.0 9.0 9.0 12.0 12.0 12.0 9.0 12.0 15.0 18.0 8.4 % Share 2015 54.0 5.0 8.0 2.0 2.0 7.0 4.0 6.0 3.0 1.0 8.0 100.0
Source: Images F&R Research 2007, ICICIdirect.com Research
After assessing the opportunity in the fast moving consumer goods business (food and personal care), the company has been launching private labels in this category. It has launched Fresh and Pure (food and staples), Cleanmate (home care), Caremate (personal care products), Tasty Treat (food, snacks, cola and soft drinks) and Premium Harvest (packaged pulses and rice). The company plans to launch more private labels in the FMCG space to generate better margins from the segment. According to the management, the gross margin in the private labels of food segment is in the range of 2040% whereas the company garners 17% margin at the category level.
Launch of private labels in FMCG space to improve margins
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Home retailing to gain traction

With the rising middle income group, increasing disposable income and higher proportion of population in the working segment (Refer Annexure IV: Growth drivers of retail sector), the spend in home improvement and consumer durables is likely to increase. Though many retailers have ventured into this category through formats like Next (Videocon), Home Stop (Shoppers Stop), Spaces (Welspun), Vijay Sales, Croma (Tata), there lies huge opportunity in this segment due to lower penetration of organised retail. Exhibit 17: Low penetration in home and consumer durable segment
700 600 500 Rs Bn 400 300 200 100 0 Soft furnishings Household appliances Retail sales (LHS)
Source: CRISIL Research, ICICIdirect.com Research
Favourable demographics and lower penetration to improve penetration of organised home retailing
30 24.6 25 20 632 8.1 5.0 136 Home dcor & furnishing 5 0 15 10 %
501
Penetration (RHS)
PRIL caters to home and consumer durables segment through its subsidiary, Home Solutions Retail Ltd, which operates various formats like Home Town, E-Zone (Consumer durables), Home Bazaar, Furniture Bazaar and Electronics Bazaar. The retail space under operation for HSRL stood at 1.8 million sq ft at the end of FY09. This is expected to reach 3.2 million sq ft by FY12E, CAGR of 22.3%. We expect the revenue of HSRL to reach Rs 2192.8 crore in FY12E from Rs 1070.7 crore in FY09, CAGR of 27%. We also expect a revival in revenue psf of HSRL on account of better consumer sentiments as signified from improvement in same store sales of home segment. Exhibit 18: Area under operations in HSRL Exhibit 19: Improving revenue psf
4 3 Mn sq ft 2 1 0 0.5 FY07 FY08 FY09 FY10E FY11E FY12E
0 FY07 FY08 FY09 FY10E FY11E FY12E Revenue (Rs Crore)
Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research
8000 6000 4000 2000

306.0
6727.2 5868.1 6048.7
6766.8
6746.3
6767.6
1.3
1.8
2.1
2.6
3.2
904.7
1070.7
1441.4
1760.9
2192.8
Revenue psf (Rs)
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Better technology implementation to improve productivity

In FY09, the company implemented various technology systems to improve its efficiency and productivity. It took initiatives to improve the inventory management system and supply chain management system to increase the shelf turnover.
Improvement in inventory management systems

PRIL undertook various measures to improve its inventory management system and supply chain management system. It deployed next generation Greenplum enterprise database to support the vast data analytics for its multi-format nationwide chain of stores. It now has real time data from stores on the sales of all its products enabling better planning and promotions, thereby improving its margin.
Implementation of better technology systems to increase shelf turnover and improve productivity
Better supply chain logistics

The company consolidated its warehouse space to seven large distribution centres. This resulted in better economies of scale on account of shared warehouse capex and overheads. This also increases the order fulfilment time and rate, enabling better availability of products in stores. The automatic replenishment system (ARS) allows timely product availability of all fast moving items at stores, lower obsolescence and lower markdowns and facilitates stock aging analysis. These initiatives increase the shelf space and shelf turnover resulting in better sales and margins. With these measures, the management expects the inventory per square foot to reach Rs 1600 psf over the next two to three years. We believe this is too aggressive an assumption and have, hence, been conservative on the same. We expect the inventory psf to reach Rs 1736 psf by FY12E from Rs 1853 psf in FY09, an improvement of 2% CAGR over FY09-12E period. Exhibit 20: Improving inventory psf
1900 1850
Rs per sq ft
1800 1750 1700 1650 FY08 FY09 FY10E FY11E FY12E 1853
1817
1815 1773 1736
Restructuring to create pure retail play Pre-restructuring: From a retailer to one-stop solutions provider
Over FY05-FY09, PRIL moved beyond retailing to provide services to consumers and other corporate clients. It forayed into a host of retail services through subsidiaries and joint ventures to cocoon itself from the intensifying competition. The massive space with the company turning into increasing footfalls has resulted in an added advantage to the company. Taking advantage of the existing approximately 200 million footfalls in its
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stores, the company established services like logistics (Future Logistics), out of home media (Future Media), distribution of financial services products (Future Capital Holdings) and venture into life and non-life insurance products (Future Generali). It also ventured into non-core retail services like development of brands (Future brands), IT services (Future Knowledge Services), retail education (Future Learning and Development), mall management services (Future Mall Management), among others. Exhibit 21: Pre-restructured organisation
Pantaloon Retail India
Standalone Core Retailing
Subsidiaries Retail and allied services
Joint Venture Specialty Retail
Lifestyle Pantaloons
Value Big Bazaar
Home Solutions Retail (66.9% stake) Retailing home products
Staples Future Office Products (37.50% stake) Staples
Central Brand Factory
Food Bazaar
Future Capital Holdings (54.8% stake) Advisory & Consumer Finance Future Logistics (94.2% stake) 3PL & 4PL services Future Media (84.2% stake) Creation of media properties Future Bazaar India (99.74% stake) E-Tailing Future Brands (76.3% stake) Pantaloon Future Ventures (100% stake) Future Agrovet (96.2% stake)
Talwalkar Pantaloon Fitness Pvt (50% stake) Health and Beauty Future Axiom (49% stake) Distribution of mobile handsets Future Generali India Insurance Co. (25.5% stake) Future Generali India Life Insurance Co. (25.5% stake)
Source: Company, ICICIdirect.com Research Note: Orange coloured boxes are still with Pantaloon Retail play Grey coloured boxes refer to non-retail business hived off or transferred to financial services holding company
Post-restructuring: Creation of a pure retail play

Pantaloon Retail is restructuring the entire business into retail and non-retail ventures. It is dividing its businesses into three parts, namely, retail, financial services and other support businesses. The motive behind such a move is to unlock shareholder value in non-retail businesses and consolidate Pantaloon Retail as a pure retail play.
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Exhibit 22: Post restructured organisation
Direct participation by PRILshareholders
Hived off
moicnjiohjinnnnnnnnnnnnnn mmmmmmmmmmmmmmmm
PANTALOON RETAIL INDIA
Listing
Non Retail Business
Pure Retail Play
Financial Services
Already Sold - Future Brands - Future Knowledge Services - Futre Learning and Development
Standalone
Brick and Mortar formats like Central, Pantaloons, Brand Factory, other smaller formats (incl. JV)
Subsidiaries
-Future Capital Holdings -Future Generali India Insurance -Future Generali India Life Insurance -Pantaloon Future Ventures
Potential to hive off - Future Mall Management - CIG Infrastructure
-Home Solutions Retail -Future Logistics -Future Media -Futurebazaar India
Big Bazaar and Food Bazaar to be hived off as a wholly owned subsidiary
Consequently, the company is planning to undergo the following restructuring process: It is planning to unlock value and consolidate its investments in the financial services business of the company, which includes holdings in Future Capital Holdings Ltd and in the insurance joint venture companies. Pantaloon Future Ventures is also expected to be classified under financial services by the company. PRIL plans to create a holding company for the financial services business and would hold a 26% stake in the holding company. The remaining 74% stake is expected to be distributed in the proportion of current shareholding pattern It plans to transfer its investments in Future Brands and its assets held by non-retail businesses held through its wholly-owned subsidiaries, namely, Future Knowledge Services and Future Learning and Development to PFH Entertainment Ltd (a promoter company) for a total value of Rs 190 crore. We have taken the profit of Rs 100 crore resulting from this transaction in our estimates as extraordinary income. The company has a few other subsidiaries like Future Mall Management and CIG Infrastructure, where the potential for further value unlocking lies. It also plans to hive-off its value retail business, which includes Big Bazaar, Food Bazaar and other related formats, into a whollyowned subsidiary.
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Pantaloon Retail holds a number of subsidiaries (Refer Annexure for subsidiary details). The restructuring process is progressing in full swing and, as a result, there is little clarity on the movement of various subsidiaries within the group. We await further clarity from the management on the detailed restructuring process and the restructured organisation. However, as the restructuring process is on a step by step basis, things will be captured in our estimates on formal announcements by the company.
Capex funding requirement eases

We expect a space addition of 8.1 million sq ft over FY10-12E. This addition would entail an additional capex requirement of Rs 4052 crore including store capex and working capital requirement. We assume store capex requirement at Rs 2800 per sq ft and working capital requirement of Rs 2250 per sq ft for the expected expansion. For part-funding the capex, the company expanded its equity by 9.1% to raise Rs 500 crore via qualified institutional placement (QIP). With the sale of non-retail businesses, it harvested another Rs 190 crore for capex requirements. Hence, a total amount of Rs 690 crore has been raised for capex funding. Consequently, the additional debt funding requirement would reduce to some extent. We expect the company to raise additional Rs 1600 crore via debt and the remaining requirement to be fulfilled by the balance amount of warrant payment and internal accruals.
QIP placement of Rs 500 crore and sale of subsidiaries for Rs 190 crore have eased the funding requirement of the company
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Risks and Concerns

Increasing competition
India has been ranked first on Global Retail Development Index, 2009 signifying that the Indian retail sector is at a peaking stage, is developing quickly and is ready for modern retail. This means the next three to four years is the best time for foreign retailers and other Indian corporate retailers to enter India. It is also the perfect time for existing players to undergo aggressive expansion. At this stage, the most preferred method of entry by retailers is expected to be supermarkets, hypermarkets and cash and carry and convenience stores. Exhibit 23: Window Opportunity Analysis, GRDI
Country India Russia China UAE Saudi Arabia Vietnam Chile Brazil Slovenia Malaysia 2009 Rank 1 2 3 4 5 6 7 8 9 10 2008 Rank 2 3 4 20 7 1 8 9 23 13 2007 Rank 1 2 3 18 10 4 6 20 17 8 2006 Rank 1 2 5 16 17 3 6 27 8 14
Foray of national and international players into the retail sector increases the competition and margin pressure for existing players
Source: AT Kearney, ICICIdirect.com Research
Large Indian players like Reliance Industries, Aditya Birla Group, Bharti Airtel, etc have aggressively entered the industry to tap the huge growth potential opportunities. Large international players like Wal-Mart, Carrefour, Tesco, Metro, etc. have entered the retail sector through the cash and carry format since foreign direct investment (FDI) in the multi-brand retail sector is not allowed yet. With increasing number of players entering, the competition is intensifying leading to margin pressure. To sustain the competition, Pantaloon has carved a niche for itself by rapidly increasing its size and reach. Through its various subsidiaries, the company is a one-stop solution provider for retail and allied services like logistics and media. It has gone beyond the brick and mortar format to launch its retail website futurebazaar.com. However, the competition still remains a threat, which it will have to sustain since retail is the core business of the company.
Store delays
Space addition is a key success driver for PRIL. Since all stores of the company are located in malls, it is highly dependent on real estate development. Since there have been delays in mall delivery in the past, store delays in future as well may result in shifting of revenues to future or losing customers to competitors.
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Working capital management

Retail companies, by nature, are working capital intensive. They have to keep high working capital to make available the required products to customers. Hence, working capital management is a crucial part of the retail business. We expect the number of working capital days of the company to decline to 55.2 in FY12E from 63.6 days in FY09, due to better supply chain management through Future Logistics Solutions and better inventory management. Exhibit 24: Working capital days
66 64 62 No. of Days . 60 58 56 54 52 50 FY07 FY08 FY09 FY10E FY11E FY12E 54.8 55.2 61.2 63.6 63.5 60.2
However, the sensitivity of working capital management to our EPS estimates remains high. A 5% increase in working capital requirement would result in 2% lower EPS estimate and vice-versa. Hence, if the company is unable bring in the efficiencies as taken in our working capital estimates; our EPS estimates will be vulnerable to downgrades. Exhibit 25: Working capital sensitivity to EPS estimates
Particulars Core Working Capital EPS 5% Increase Revised EPS % Chg 5% Decrease Revised EPS % Chg
Source: ICICIdirect.com Research
Working capital sensitivity for the retailer is high with 5% increase in working capital resulting in 2% decline in EPS
FY10E 2774.0 14.2 2912.7 13.9 -1.8 2635.3 14.4 1.8
FY11E 3281.0 14.5 3445.05 14.1 -2.3 3117.0 14.8 2.3
FY12E 3984.0 19.0 4183.2 18.6 -2.1 3784.8 19.4 2.1
High debt to equity

The company reported debt of Rs 2850 crore at the end of FY09, which translates into a debt to equity ratio of 1.25x. However, to add approximately 2.5 million sq ft each year, the company will need additional funds for capex and working capital requirements. Hence, it raised Rs 500 crore through qualified institutional placement resulting in lower debt to equity ratio of 1.06x in FY10E. According to the management, this is enough for the next 12-18 months of equity requirement. The retail business runs on wafer thin margins and, hence, internal accruals will not be sufficient to fund expansion plans. Consequently, we have assumed that the additional amount of fund raising would be through debt and, therefore, the debt to equity ratio is expected to rise to 1.13x in FY11E and 1.22x in FY12E.
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Exhibit 26: Rising debt to equity levels

1.3 1.3 1.2 times 1.2 1.1 1.1 1.0 FY08 FY09 FY10E FY11E FY12E 1.06 1.19 1.13 1.25 1.22
Comparing PRIL with its Asian peers, we conclude that it is on the higher side of the curve. Its Asian peers have far lower debt to equity as can be seen from the data ahead. Thus, PRIL would have to raise more equity and serve capex requirement on internal accruals for its further expansion, where we are conservative and have assumed increased debt funding. Exhibit 27: Rising debt to equity levels
1.20 1.00 0.80 times 0.60 0.40 0.20 0.00 Shinsegae Co Lotte Parkson Lifestyle Golden Eagle Giordano Ltd Shopping Co Retail Group International Retail Group International Ltd Ltd Holdings Ltd Ltd Ltd Pantaloon Retail 0.13 0.04 0.59 0.50 1.09 1.06
1.02
Source: Bloomberg, ICICIdirect.com Research
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Financials
Impressive sales growth
The total revenue of the company has shown impressive CAGR of 50.3% over FY06-FY09 to reach Rs 6341.7 crore in FY09 from Rs 1052.8 crore in FY05. This is on account of aggressive expansion in space from 2.03 million sq ft in FY05 to 9.65 million sq ft in FY09, 47.7% CAGR. This growth was driven by aggressive expansion of the Big Bazaar format. We expect the total revenue of the company to double to reach Rs 12473.6 crore in FY12E from Rs 6341.7 crore in FY09 backed by 22.6% CAGR in retail space from 9.65 million sq ft in FY09 to 17.8 million sq ft in FY12E. We also expect an improvement of 1.9% CAGR in revenue psf over FY09-12E on account of higher share of lifestyle segment. We believe Big Bazaar will maintain its dominance in total revenue even post FY12E due to the high share of space in total space within the company. Exhibit 28: Revenue to grow at 25.3% CAGR
14000 12000 10000 8000 6000 4000 2000 0 FY07 FY08 FY09 Revenue (Rs Crore) FY10E FY11E Revenue psf (Rs) FY12E 3236.7 8415.9 5048.9 7654.4 7263.1 7231.1 7439.8 7677.5 6341.7 7890.2 10006.1 12473.6
Sales growth to be driven by 22.6% CAGR of retail space and 1.9% CAGR of average revenue psf
Improving SSS growth on back of better consumer sentiments

The growth in same store sales (SSS) is an indicator of performance of a retail store. This has been a positive for a major part of the last two years signifying location advantages for PRIL stores. After the financial turmoil in 2008, consumer sentiments have become positive from June 2009. The growth in lifestyle and value retail has been similar since January 2009 signifying that consumers are looking for bargain steals as well as going for purchases, which they had postponed earlier. However, the home retailing segment is still a laggard and traction is expected to begin soon. With better economic stability and increasing job certainty, we expect an improvement in the same store sales growth of the company, going forward. This would translate into higher sales and better margin for the company.
Improving SSS would lead to better shelf turnover, thereby increasing sales and profitability
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Exhibit 29: SSS growth showing traction

60.00 40.00 20.00 % 0.00 Nov-07 Nov-08 Jul-07 Jan-07 Jan-08 Jul-08 Sep-07 May-07 May-08 Sep-08 Jan-09 -20.00 -40.00 Value Retailing
Life Style Retailing
Home Retailing
Uptrend in margin to continue

Over FY05-FY07, the margins of the company were under pressure mainly on account of higher expenses like cost of goods sold, employee cost and rental cost. The operating profit margin of the company decreased to 6.66% in FY07 from 8.6% in FY05. The net profit margin also declined due to rising depreciation and interest cost resulting from aggressive capital expenditure. The adjusted net profit (adjusted for onetime transactions and other income) margin declined from 3.4% in FY05 to 0.9% in FY07. However, with economies of scale rising from increased space under operations, cost reduction methods and adoption of better inventory management and supply chain management systems, the operating profit margin of the company improved to 10.5% in FY09 from 6.7% in FY07. Adjusted net profit margin declined to 2.2% in FY09 from 2.5% in FY08. Going forward, we expect the company to maintain its margins wherein the operating profit margin is expected to be 11% in FY12E and adjusted net profit margin is expected to be 3.0% in the same period. This is on back of expected rise in share of lifestyle stores, better economies of scale, increasing share of private labels and continued implementation of cost reduction measures. Adjusted PAT margin is expected to rise on account of lower interest expense resulting from reduced funding of capex from debt. Exhibit 30: Improving cost structure
80 70 60 % of net revenue 50 40 30 20 10 0 FY08 FY09 Cost of goods sold FY10E Emp Exp FY11E Rentals FY12E SG&A 5.4 6.5 9.4 4.3 6.4 8.9 4.2 6.5 8.9 4.3 6.5 9.1 4.4 6.4 9.1 69.6 69.9 69.7 69.3 69.1
May-09
Mar-07
Mar-08
Mar-09
Margins to improve on account of cost reduction measures and rising share of lifestyle segment and private labels
Exhibit 31: Margins rise higher

12 10 8 6 4 2 0 FY08 FY09 FY10E FY11E FY12E Operating Margin Adj. Net Profit Margin 2.5 2.2 2.6 2.8 3.0 % 9.1 10.5 10.7 10.9 11.0
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Better coverage ratios

Over FY05-FY09, PRIL undertook aggressive expansion of Rs 2093 crore in capex and Rs 1626 crore in working capital to take advantage of first mover in the retail sector. This growth was financed both through debt and equity. However, due to intense competition in the sunrise retail sector, the profitability of the company declined resulting in lower interest coverage ratio every year. The interest coverage ratio declined to 1.7x in FY09 from 3.5x in FY06. Nevertheless, we expect a gradual improvement in interest coverage ratio due to part financing of expansion from equity (QIP and warrants) and increased profitability, going forward. We expect interest coverage ratio to reach 2.1x in FY12E from 1.7x in FY09. Exhibit 32: Interest coverage ratio to increase
4 4 3 3 times 2 2 1 1 0 FY10E FY11E FY12E FY06 FY07 FY08 FY09 2.1 1.7 2.0 2.1 3.5 3.0
1.9
Coverage ratio to improve on equity funding, unlocking value in non-retail businesses and better profitability
Improving return ratios

We expect a gradual improvement in return ratios of PRIL on account of improved profitability, efficiency and productivity arising from better technology and cost reduction measures. The RoCE is expected to reach 14.3% in FY12E from 11.7% in FY09 while RoE is expected to reach 10.7% in FY12E from 6.8% in FY09. Exhibit 33: Return ratios turn better
16 14 12 10 8 6 4 2 0 FY08 FY09 FY10E RONW
11.8
11.7
11.9
13.1
14.3 10.7
10.3 8.6 6.8
9.0
FY11E ROCE
FY12E
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Operating cash flow turning positive in FY09

In FY09, the cash flow from operations (CFO) turned positive, which is a major trigger to indicate improving fundamentals of the company. Despite rising debt and higher working capital requirements, the company reported CFO of Rs 206.11 crore in FY09. We believe this should be sustainable for the company on account of improved profitability and efficiency. We expect CFO to stand at Rs 777.2 crore in FY12E despite aggressive expansion, going ahead due to PRILs continuous expected focus on profitable growth. Exhibit 34: Positive CFO
1000 800 600 Rs Crore 400 206.1 200 0 -200 -400 FY06 -89.8 FY07 -271.9 FY08 -19.2 FY09 FY10E FY11E FY12E 55.9% CAGR 397.2 780.2 651.2
Positive CFO would ease the funding requirement of the company
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Valuations
Pantaloon Retail is a one-stop retail services solution provider. It caters to approximately 60% of the wallet share of the consumer. It has ready consumers for its retail related services at present due to the massive retail space under operations providing access to above 200 million consumers and various corporate clients for allied services. We believe the company will be able to create synergies in various businesses and are positive on the business model of the company. We have valued the company on a sum-of-the-parts basis to reflect the value of various subsidiaries that the company owns. The core retail businesses of PRIL standalone have been valued through DCF to take into account the efficiencies arising out of better utilisation of resources. We have valued Home Solutions Retail on relative valuation multiple as the company is still not making profits at the EBITDA level. We value Future Capital Holdings on a 30% discount to market capitalisation, as it is a listed entity. We have not included the valuation of other subsidiaries in our target price as all of them are at nascent stage. We believe it is too early to value them and, hence, would wait for these subsidiaries to gain some traction before including them in our target price. Accordingly, we have arrived at a target price of Rs 425 per share giving a potential upside of 21.4%. We are initiating coverage with a STRONG BUY rating. Exhibit 35: Sum-of-the-parts of PRIL
Name of the company Standalone Value Subsidiaries Home Solutions Retail (66.9% stake) Future Capital (54.8% stake) Total
Source: ICICIdirect.com Research Note: Per Share value has been calculated on fully diluted equity of PRIL
Basis of Valuation DCF Market Cap / Sales Market Capitalisation
Total Value (Rs Crore) PRIL share Per Share Value 7226.73 7226.73 370.2 1096.40 1435.28 9758.40 733.49 550.57 8510.79 26.3 28.2 424.7
PRIL standalone valued at Rs 370 per share

PRIL, on a standalone basis, includes Pantaloons, Big Bazaar, Food Bazaar, Central, Brand Factory, Fashion Station, aLL, Depot and other small formats. We value it on a DCF basis to take into account the store roll out assumptions and improving profitability, going forward, resulting from better sales mix, improving efficiency and productivity, easing rental and other costs. We have valued the company on a three stage DCF basis, wherein explicit assumptions have been made till FY19. Thereafter, we have assumed a terminal growth of 5% for the company. With these assumptions, we have arrived at a value of Rs 7226.7 crore translating into per share value of Rs 370 on a fully diluted equity. We expect the fully diluted equity of the company to reach Rs 39 crore after adjusting for QIP issue and warrants issued to promoters.
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Exhibit 36: Sensitivity

Wacc 10.9% 11.4% 11.9% 12.4% 12.9% 4.0% 421 363 313 269 231 Terminal Growth Rate 4.5% 5.0% 460 505 395 432 340 370 292 317 250 272 5.5% 559 475 406 347 296 6.0% 624 527 447 380 324
Exhibit 37: Basic Assumptions

Assumptions Risk free rate Beta Equity risk premium WACC Terminal Growth Rate
7.6% 1.2 5.1% 11.9% 5.0%
At the CMP of Rs 350, the stock is available at 28.2x and 24.1x its FY10E and FY11E adjusted earnings, which we believe is very attractive. The company has better growth visibility as compared to its peers and is also expanding aggressively to increase its reach within the country. Exhibit 38: Global Peer Valuations
P/E(x) 2010 2011 Wal-Mart Stores Inc* Kohl's Corp* JC Penney Co Inc* Costco Wholesale Corp@ Target Corp* Gap Inc* Carrefour SA# Next PLC* Marks & Spencer Grp PLC** Tesco PLC$ Metro AG# Shinsegae Co Ltd# Lotte Shopping Co Ltd# Parkson Retail Group Ltd# Lifestyle International Hldgs# Golden Eagle Retail Group# Giordano International Ltd# Average 15.1 17.5 26.4 20.7 14.7 14.5 11.9 11.9 14.4 14.6 19.3 17.8 14.8 39.0 25.0 49.3 20.5 20.4 13.9 15.4 18.1 18.4 13.0 13.3 9.8 11.5 13.6 13.2 16.6 15.6 13.5 31.7 22.1 36.2 14.1 17.1 P/BV(x) EV/EBITDA(x) Mcap/Sales(x) EBITDA Margin(%) PAT Margin(%) 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2.9 2.3 1.3 2.3 2.2 3.1 1.5 10.7 2.8 2.4 2.6 2.4 1.1 9.6 4.1 15.5 1.8 4.0 2.6 2.1 1.3 2.1 1.9 3.0 1.4 7.0 2.5 2.2 2.5 2.1 1.0 8.2 3.8 12.3 1.7 3.4 7.9 7.9 6.4 8.8 7.7 5.7 5.0 7.2 7.3 9.0 6.1 12.0 9.5 24.3 17.4 28.9 9.5 10.6 7.4 6.8 5.3 7.9 6.8 5.2 4.5 6.6 6.8 8.2 5.6 10.9 8.8 19.1 15.1 22.9 6.6 9.1 0.5 1.0 0.4 0.3 0.5 1.1 0.2 1.2 0.7 0.6 0.2 1.0 0.9 9.7 6.2 14.6 0.8 2.4 0.5 0.9 0.4 0.3 0.5 1.1 0.2 1.2 5.1 0.5 0.2 1.0 0.9 8.1 5.7 11.7 0.7 2.3 7.6 13.0 6.5 3.6 9.9 15.9 5.2 18.5 12.6 8.3 4.9 12.0 10.9 40.6 36.8 48.0 6.7 15.4 7.7 13.8 7.5 3.8 10.3 16.5 5.5 18.6 12.9 8.4 5.1 12.2 11.1 41.7 38.0 48.4 8.8 15.9 3.4 5.5 1.4 1.7 3.6 7.3 1.4 10.0 4.8 4.0 1.2 5.8 6.2 25.2 25.3 27.5 3.8 8.1 3.5 5.9 2.1 1.7 3.9 7.7 1.7 10.2 4.8 4.1 1.3 6.2 6.3 25.7 25.6 32.6 5.2 8.7 ROE(%) 2010 2011 20.1 13.3 5.6 11.8 15.7 22.0 12.0 111.5 20.5 16.9 13.2 14.3 7.9 26.2 17.3 30.5 8.4 21.6 19.9 14.7 7.7 12.2 15.2 21.2 14.2 71.1 18.9 17.0 14.8 14.3 8.1 28.0 17.0 38.3 12.5 20.3 ROCE(%) 2010 2011 8.8 11.2 2.0 5.5 5.1 22.2 2.6 18.9 7.0 12.0 1.8 5.8 5.2 10.2 8.5 12.2 5.8 8.5 9.1 14.7 3.0 5.9 5.8 21.0 3.5 18.3 7.2 12.1 2.8 6.2 5.3 11.7 9.1 17.1 12.5 9.7
Source: Bloomberg, ICICIdirect.com Research Note: * - January year ending, # - December year ending, @ - August Year ending, ** - March Year Ending, $ - February year ending
Exhibit 39: Indian Peer Valuation

Pantaloon Retail India^ Shopper's Stop Titan Industries
P/E(x) 2010 2011 28.2 24.1 66.5 29.9 29.2 23.6
P/BV(x) EV/EBITDA(x) Mcap/Sales(x) EBITDA Margin(%) PAT Margin(%) 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2.3 2.1 11.2 9.5 0.8 0.7 10.7 10.9 3.4 2.8 5.0 4.4 18.5 12.6 0.8 0.7 5.3 6.6 1.1 2.3 8.5 6.8 17.6 14.4 1.4 1.2 7.8 8.0 4.6 4.9
ROE(%) 2010 2011 10.4 9.1 7.1 11.7 32.2 31.5
ROCE(%) 2010 2011 12.0 13.1 1.8 4.4 10.4 10.3
Source: Bloomberg, ICICIdirect.com Research Note: ^ June year ending and EPS adjusted for extraordinary items
HSRL valued at Rs 26
HSRL includes Home Town, Home Bazaar, E-zone, Electronics, Collection I and Furniture Bazaar. It is a loss making company at present and the management expects the company to be profitable at the EBITDA level in FY10. Hence, we value the company on market capitalisation to sales basis to take into account the growth prospects due to its expansion in the near future. We have valued it at a discount to global peers as it is loss making even at the EBITDA level. We value
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HSRL at 0.5x its FY12E sales of Rs 2192.8 crore, to arrive at a total value of Rs 1096.4 crore, translating into PRILs 66.9% stake at Rs 26 per share, after a holding discount of 30%. Exhibit 40: Global Peer Valuation (Home Category)
Bed Bath & Beyond Inc$ Home Retail Group PLC$ Home Depot Inc* Kingfisher PLC* Average
P/E(x) 2010 2011 20.6 18.0 20.4 17.5 18.4 16.9 16.5 14.3 19.0 16.7
P/BV(x) EV/EBITDA(x) Mcap/Sales(x) EBITDA Margin(%) PAT Margin(%) 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2.9 2.7 9.3 8.6 1.4 1.3 13.1 13.2 6.6 7.0 0.9 0.9 6.8 6.2 0.5 0.5 6.1 6.5 2.2 2.6 2.5 2.4 8.7 8.1 0.7 0.7 9.8 10.2 3.9 4.2 1.1 1.1 7.9 7.1 0.5 0.5 7.7 8.1 3.2 3.5 1.8 1.8 8.2 7.5 0.8 0.7 9.2 9.5 4.0 4.3
ROE(%) 2010 2011 14.8 13.8 4.7 5.5 13.8 14.2 6.4 7.1 9.9 10.2
ROCE(%) 2010 2011 10.7 10.5 3.6 3.3 6.4 6.9 3.4 3.8 6.0 6.1
Source: Bloomberg, ICICIdirect.com Research $ - February year ending, * - January year ending
Future Capital valued at Rs 28

Since Future Capital Holdings is a listed entity, we have valued it on a market capitalisation basis. At the current market price of Rs 227, we have arrived at a market capitalisation of Rs 1435 crore translating PRILs 54.8% stake into per share value of Rs 28 on a fully diluted equity.
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FINANCIALS
P&L Statem ent Sales G rowth (%) Op. Expenditure EB ITDA G rowth (%) Other Incom e Depreciation EB IT Interest PB T G rowth (%) Tax Extraordinary Item Rep. PAT before M I M inority interest (M I) Rep. PAT after M I Adjustm ents Adj. N Profit et G rowth (%) FY08 5048.9 56.0 4588.4 460.5 113.6 3.8 83.4 380.9 185.3 195.6 8.1 69.7 0.0 125.9 0.0 125.9 0.0 125.9 5.0 FY09 6341.7 25.6 5673.3 668.4 45.1 6.1 140.1 534.4 318.2 216.2 10.5 75.7 0.0 140.6 0.0 140.6 0.0 140.6 11.6 FY10E 7890.2 24.4 7042.6 847.6 26.8 6.5 181.8 672.3 354.9 317.4 46.8 146.1 100.0 271.3 0.0 271.3 65.0 206.3 46.8 FY11E 10006.1 26.8 8917.4 1088.6 28.4 6.9 232.2 863.4 426.3 437.1 37.7 153.0 0.0 284.1 0.0 284.1 0.0 284.1 37.7 (Rs Crore) FY12E 12473.6 24.7 11105.0 1368.6 25.7 7.9 292.5 1084.0 509.9 574.1 31.4 200.9 0.0 373.2 0.0 373.2 0.0 373.2 31.4 Key ratios (Industry specific cost) (%) FY08 FY09 Cost of goods sold 69.6 69.9 Em Exp p 5.4 4.3 Rentals 6.5 6.4 SG &A 9.4 8.9 Average cost of debt 8.5 11.2 Effective Tax rate 35.6 35.0 Profitability ratios (%) EB ITDA M argin 9.1 10.5 PAT M argin 2.5 2.2 Adj. PAT M argin 2.5 2.2 Per share data (Rs) Revenue per share 316.9 363.6 EV per share 480.0 507.2 B ook Value 110.0 126.8 Cash per share 7.6 6.3 EPS 7.9 8.1 EPS (Adj.) 7.9 8.1 Cash EPS 13.1 16.1 DPS 0.0 0.7 Costs as % to sales except tax rate and averag FY10E 69.7 4.2 6.5 8.9 11.3 46.0 10.7 3.4 2.6 414.8 504.6 152.5 10.9 14.3 12.4 23.8 0.7 FY11E 69.3 4.3 6.5 9.1 11.5 35.0 10.9 2.8 2.8 512.5 530.8 167.1 9.6 14.6 14.6 26.4 0.7 FY12E 69.1 4.4 6.4 9.1 11.5 35.0 11.0 3.0 3.0 638.9 572.0 185.4 5.7 19.1 19.1 34.1 0.7
B alance Sheet Equity Capital Class A Equity Capital Class B Share W arrants Reserves & Surplus Shareholder's Fund M inority Interest Secured Loans Unsecured Loans Deferred Tax Liability Source of Funds G ross B lock Less: Acc. Depreciation N B et lock Capital W IP N Fixed Assets et Intangible asset Investm ents Cash Trade Receivables Loans & Advances/Others Inventory Total Current Asset Current Liab. & Prov. N Current Asset et Application of funds FY08 31.9 0.0 63.3 1751.5 1846.6 0.0 1991.8 200.0 67.8 4743.9 1368.8 170.6 1198.2 330.6 1528.8 0.0 586.5 121.1 113.2 964.5 1429.8 2628.6 637.7 1990.9 4743.9 FY09 34.9 3.2 22.9 2211.5 2272.4 0.0 2525.5 324.9 116.1 6150.8 1876.5 307.7 1568.8 345.2 1914.0 0.0 954.0 109.3 177.3 1208.3 1787.8 3282.7 911.9 2370.9 6150.8 FY10E 38.0 3.2 22.9 2901.7 2965.8 0.0 2725.9 422.3 176.3 7362.3 2584.4 489.4 2095.0 350.0 2445.0 0.0 864.0 207.3 200.0 1436.0 2210.0 4053.3 1072.0 2981.3 7362.3 FY11E 39.0 3.2 0.0 3261.3 3303.5 0.0 3167.8 549.0 268.1 8543.4 3297.7 721.6 2576.1 380.0 2956.1 0.0 864.0 187.3 240.0 1686.0 2610.0 4723.3 1255.0 3468.3 8543.4
(Rs crore) FY12E 39.0 3.2 0.0 3619.5 3661.7 0.0 3731.1 713.7 389.4 9945.9 4151.0 1014.1 3136.9 400.0 3536.9 0.0 864.0 110.9 286.0 2063.0 3085.0 5544.9 1450.0 4094.9 9945.9
Key ratios Return ratios RoN W ROCE ROIC Financial health ratio Operating CF (Rs Cr) FCF (Rs Cr) Cap. Em (Rs Cr) p. Debt to equity (x) Debt to cap. em (x) p. Interest Coverage (x) Debt to EB ITDA (x) DuPont ratio analysis PAT/PB T PB T/EB IT EB IT/N sales et N Sales/ Tot. Asset et Total Asset/ N W
FY08 6.8 11.8 17.7 -19.2 -904.1 4106.2 1.2 0.5 1.1 4.8 0.6 0.5 0.1 0.9 2.9
FY09 6.2 10.2 16.2 206.1 -382.3 5238.9 1.3 0.5 0.7 4.3 0.7 0.4 0.1 0.9 3.1
FY10E 7.0 10.7 13.8 397.2 -411.5 6290.3 1.1 0.5 0.9 3.7 0.7 0.5 0.1 0.9 2.8
FY11E 8.6 11.8 16.4 651.2 -192.6 7288.4 1.1 0.5 1.0 3.4 0.7 0.5 0.1 1.0 3.0
(%) FY12E 10.2 12.8 16.2 780.2 -225.2 8495.9 1.2 0.5 1.1 3.2 0.7 0.5 0.1 1.1 3.1
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Contd
Cash Flow Statement Net Profit Before Tax Other Non Cash Exp Depreciation Direct Tax Paid Net Interest CF before change in WC Inc./Dec. in Current Liab. Inc./Dec. in Current Assets CF from operations Purchase of Fixed Assets Others CF from Investing Inc./(Dec.) in Debt Inc./(Dec.) in Net worth Others CF from Financing Opening Cash balance Closing Cash balance Y-oY Growth (%) Net sales EBITDA Adj. net profit Cash EPS Net worth FY08 195.6 0.9 83.4 -43.5 185.3 421.7 218.2 -659.2 -19.2 -854.0 -556.8 -1410.8 892.2 690.1 -194.1 1388.2 163.0 121.1 FY08 56.0 113.6 5.0 23.0 69.1 FY09 216.2 3.5 140.1 -33.1 318.2 644.9 157.6 -596.4 206.1 -536.3 -308.3 -844.6 658.6 298.8 -330.6 626.7 121.1 109.3 FY09 25.6 45.1 11.6 22.4 23.1 FY10E 417.4 -106.5 181.8 -50.1 354.9 797.5 158.6 -558.9 397.2 -712.8 -13.7 -726.5 297.8 496.8 -367.4 427.2 109.3 207.3 FY10E 24.4 26.8 46.8 48.0 30.5 FY11E 437.1 -6.9 232.2 -52.4 426.3 1036.2 180.0 -565.0 651.2 -743.3 -125.0 -868.3 568.6 67.6 -439.1 197.1 207.3 187.3 FY11E 26.8 28.4 37.7 11.0 11.4 (Rs crore) FY12E 574.1 -7.9 292.5 -68.9 509.9 1299.7 190.0 -709.5 780.2 -873.3 -188.5 -1061.8 728.0 0.0 -522.7 205.3 187.3 110.9 FY12E 24.7 25.7 31.4 28.9 10.8 Working Capital Working cap./Sales Inventory turnover Debtor turnover Creditor turnover Current Ratio Quick ratio Cash to abs. Liab. WC (Excl. cash)/sales FY08 39.4 4.4 56.6 12.6 4.1 1.9 0.2 0.4 FY09 37.4 3.9 43.7 9.8 3.6 1.6 0.1 0.4 FY10E 37.8 3.9 41.8 9.0 3.8 1.7 0.2 0.4 FY11E 34.7 4.2 45.5 9.6 3.8 1.7 0.1 0.3 FY12E 32.8 4.4 47.4 10.2 3.8 1.7 0.1 0.3
FCF Calculation EBITDA Less: Tax NOPLAT Capex Change in working cap. FCF Valuation PE (adj.)(x) EV/EBITDA (x) EV/Sales (x) Dividend Yield (%) Price/BV (x)
460.5 69.7 390.8 854.0 440.9 -904.1
668.4 75.7 592.8 536.3 438.8 -382.3
847.6 146.1 701.5 712.8 400.3 -411.5
1088.6 153.0 935.7 743.3 385.0 -192.6
(Rs Crore) 1368.6 200.9 1167.6 873.3 519.5 -225.2
FY08 44.3 16.6 1.5 0.0 3.0
FY09 43.4 13.2 1.4 0.2 2.7
FY10E 28.2 11.3 1.2 0.2 2.2
FY11E 24.1 9.5 1.0 0.2 2.1
FY12E 18.3 8.2 0.9 0.2 1.9
25 | Page
ANNEXURE I: SUBSIDIARIES
Exhibit 41: Key Subsidiaries Performance
Name CIG Infrastructure Future Capital Holdings Limited Home Solutions Retail (India) Limited Future Agrovet Limited Future Logistic Solutions Limited Future Brands Ltd Future Mall Management Ltd Future Media (India) Limited Future Mobile and Accessories Ltd Future Knowledge Services Limited. Future Learning and Development Limited Future E-Commerce Infrastructure Limited Futurebazaar India Winner Sports Private Ltd.
% Stake 51.0 54.8 66.9 96.2 94.2 76.3 100.0 84.2 100.0 100.0 100.0 72.0 99.7 100.0
Turnover 0.0 136.0 1071.0 391.0 194.0 19.0 0.0 46.0 43.1 47.0 5.0 118.0 71.9 33.0
EBITDA(%) NA 31.5 -3.4 0.4 5.3 1.7 NA -13.0 NA 3.0 21.9 -20.5 NA 5.9
PAT Capital Employed 0.0 NA 9.3 1,217.0 -5.7 674.0 -3.1 61.0 0.2 35.0 6.2 15.0 0.0 NA -7.7 42.0 -2.8 NA 0.1 45.0 -0.2 33.0 -18.7 54.0 -0.1 NA -0.4 43.0
Home Solutions Retail tapping the home improvement segment

Home Solutions Retail (HSRL) caters to the home building and improvement segment primarily in the furniture and consumer durables and electronics segment. It provides complete home solution through its flagship format Home Town. It also operates other smaller formats like Collection I (lifestyle) and Furniture Bazaar (Value) in furniture segment and E-Zone (lifestyle) and Electronics Bazaar (value) in the consumer durables segment. The company recently launched a new format, Home Bazaar, mainly targeted at B and C cities catering to the specific needs of customers along with Value Benefits. According to Images India Retail 2007 report, the furniture, IT and consumer durables segment is expected to increase to US$71 billion in 2015 from US$23 billion at present, a CAGR of 12%. The market share of this segment is expected to increase to 11% from 8% in this period. We expect the company to leverage efficiently on the opportunity and increase its retail space to 3.2 million sq ft in FY12E from 1.8 million sq ft in FY09. With improving consumer sentiments, we expect HSRL to turn profitable at the EBITDA level in FY11E. The revenue of the company is also expected to double over FY09 to FY12E from Rs 1070.7 crore in FY09 to Rs 2192.8 crore in FY12E. Exhibit 42: Home Solutions Retail formats
Home Town 8.6 lakh sq ft E-zone 4.7 lakh sq ft Collection I 1.1 lakh sq ft
HSRL to double its revenue to 2193 crore by FY12E with a positive EBITDA
Home Solutions Retail
Lifestyle formats Value formats

Home Bazaar 1.1 lakh sq ft Electronics Bazaar 0.2 lakh sq ft Furniture Bazaar 1.2 lakh sq ft Home Town Bazaar 0.8 lakh sq ft
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Futurebazaar.com to capture online customers

With the launch of futurebazaar.com through Futurebazaar India Ltd (FBIL), PRIL entered into online retailing a.k.a. e-tailing. E-tailing reduces the capex and increases the reach of the company at minimal extra cost. It reduces costs like rental, employee cost, inventory carrying costs, etc. which would have to be incurred in a brick and mortar format. It creates time utility by saving travelling cost for the customer and transportation cost for the company. PRIL is creating synergy in both the brick and mortar format and e-tailing by providing similar deals on both platforms. The online customers were offered the same deals like that available at Big Bazaar between January 26 and 28, the Sabse Saste 3 Din phenomenon. Combining the online portal with catalogue retailing through kiosks located in malls and shopping centres, the format attracted a new set of customers. According to industry estimates, the Indian online shopping business is likely to grow by 150% to touch Rs 5,500 crore in 2007-08 from Rs 2,300 crore in 2006-07. The company turned profitable in FY08 with net profit of Rs 3.95 crore and revenue of Rs 15.64 crore. In FY09, FBIL reported total income of Rs 71.88 crore with a marginal net loss of Rs 0.14 crore.
Future Bazaar profitable at the EBITDA level with a turnover of 71.88 crore in FY09
Strong logistics network through Future Logistics Solutions

PRIL forayed into the logistics business through Future Logistics Solutions Ltd (FLSL). Initially set up for captive supply chain management (SCM), the company will also be providing logistics services to Future groups subsidiaries, associations, alliances and vendors. It will cater to logistics, transportation and warehousing requirements of customers. Its operations focus on five major verticals, namely warehousing, transportation, international logistics, brand distribution and reverse logistics. The company now has a current warehouse space of over 3.5 million sq ft with 67 warehouses across 32 locations. It overseas operations of existing fleet of over 600 trucks, contracted from established regional and national carrier. The total consolidated warehouse space that the company plans to have operational by 2010-1011 is nearly 7.50 million square feet. In FY09, FLSL reported total income of Rs 194 crore with an EBITDA margin of 5.3%.
Future Logistics plans to operate 7.5 million sq ft of warehouse space by 2010-11
Capitalising on store space through Future Media

To leverage on the existing customer base in the PRIL stores, the company created Future Media to build and sell media properties in the consumption space. Future Media operates in the out of home (OOH) segment through its media properties like Visual Spaces, Print, Radio, Television and Activation entirely focused on integrated retail space. Visual spaces includes offering brands an opportunity to showcase their identities inside the shopping environment, such as shopping trolleys, carry-bags, elevator doors, standees, danglers, trial rooms, counters, instore signage, product displays and facades. FMCG brands, industrial application companies and leading auto companies are already heavy advertisers on the Future Media network. Among print properties, Future Media offers My World, a monthly magazine targeted at women, to select customers of Big Bazaar and now has also started issuing it on subscription. It launched Future TV, the television network across Indias largest retailscape. It is the first retailer-owned channel in India, and aims at converting footfalls into eyeballs by engaging the consumer while in the mode of consumption. At present, there are over 1500 screens across 44 cities in India. Future Theatre is the media vehicle that caters to the everincreasing cinema-going audiences, which includes the on-screen
27 | Page
advertising rights for the Inox chain of multiplexes. The company has further strengthened this vertical by acquiring advertising rights of Eros Cinema in Mumbai and E-Square chain of multiplexes in Pune to its kitty. In FY09, the company reported revenue of Rs 46 crore with a negative EBITDA margin of 13%. Exhibit 43: Services by Future Media
Future Media
Visual Spaces
Print
Radio
Television
Facades Drop-downs Standees Kiosks Banners Floor stickers Elevator branding Trial room branding Show windows
My World
Future Radio
Future TV
Creating and nurturing consumption led sectors through Future Ventures

To create, build acquire, invest in and operate innovative and emerging businesses in Indias rapidly growing consumption-led sectors, PRIL acquired Subhikshith Finance & Investments Limited and renamed it as Future Ventures India Ltd (FVIL). FVIL intends to exercise operational control or influence in the business ventures that it promotes or in which it acquires interests. In addition to allocating and providing capital, it intends to create, operationally manage and strategically mentor these businesses. The company seeks opportunities at various stages of the growth cycle from nascent to mature businesses. The business ventures of the company will get the access to resources available within the Future Group, which is also focusing on consumptionled sectors in India. The company has entered into a consulting and advisory services agreement with FCH under which it will source and analyse opportunities and provide consulting and advisory services, as well as share its proprietary research. FVILs existing business ventures include interests in Sula Wines (the second largest wine maker), Biba Apparels Private Ltd (a womens apparel business), Mother Earth (a retail that supplies organic food), Aadhar (a joint venture with Godrej), Sankalp Retail Value Stores Private Limited (the Indian franchisee of Dollar Stores International) and SSIPL Retail Private Limited (a retailer of sportswear and footwear). Post-restructuring, we expect this subsidiary to be hived off in the financial services holding company. Future Ventures has filed the Draft Red Herring Prospectus for an initial public offering with Sebi, which will enable the shareholders of PRIL to unlock value in the near term.
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Facilitating consumption through Future Capital

Future Capital Holdings, the financial services arm of the Future group, is in the business of providing investment advisory services, retail financial services and research services. It provides private equity and investment advisory services to consumption related sectors. In retail financial services, the company provides consumption loans and personal loans and marketing and distribution of Future Cards (credit card). PRIL with its decade experience will facilitate FCH in advising its clients. In the retail financial services segment, FCH has exclusive right to provide financial products and services at present and future malls, stores and retail outlets in India which are owned, controlled or managed by PRIL and its subsidiaries. Thus, FCH can leverage on existing customers of PRIL reducing the cost of customer acquisition. Also, association with Future group malls, stores and retail outlets will provide better brand recognition reducing the entry barriers in the industry. Exhibit 44: Services by Future Capital
Future Capital Holdings
Investment Advisory Services
Retail Financial Services
Research
Real Estate
Private Equity
Future Money
Future Card
Retail / Mixed Use Kshitij Fund USD 89 mn Horizon Fund USD 350 mn
Hotels
Indivision Fund USD 350 mn
Personal Loans
Indus Fund USD 200 mn
Consumption Loan
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ANNEXURE II: Joint venture performance

Exhibit 45: Key JV performance
Name Future Axiom Telecom Future Generali India Life Insurance Co Future Generali India Insurance Co. Apollo Design Apparel Parks Goldmohur Design & Apparel Park Staples Future Office Products Private Talwalkars Pantaloon Fitness Private Y/E is March 2009
% Stake 50.0 25.5 25.5 39.0 39.0 37.5 50.0
Turnover 286.9 38.5 19.4 109.4 106.9 111.3 6.1
PAT -32.9 -25.6 -8.4 5.3 5.0 -13.1 -1.9
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ANNEXURE III: Management Team

Excellent Management Team
The growth of PRIL has been primarily fuelled by Kishore Biyani, Managing Director of the company. His vision and foresight has created a revolution for the retail sector in India taking a company with single format to multiple formats. From a retailer, the company has been transformed into a retail services provider. He segregated the business into various subsidiaries and roped in the best talent available in the industry to manage them. PRIL is now a professionally managed company as against a one-man show a decade ago. We believe this talent will enable the company to manage its assets in a better manner and create a new benchmark for other players. Exhibit 46: Professional Team
Name Designation Educational Qualifications Previous Assignments
Rakesh Biyani
CEO - Retail
Advanced Management Program - Harvard On the Board of Pantaloon Retail (India) Ltd. Business School Boston, B.Com. Vedanta Resources Group, Motorola India Ltd., Credit Lyonnais, HSBC, IL & FS, Citibank, NA. Grasim Industries Ltd., H & R Johnson Ltd., Bombay Dyeing & Manufacturing Ltd.
B Anand Anshuman Singh
Director Finance, Future Group B.Com. (Honours), CA
Sandip Tarkas Santosh Desai Damodar Mall Hans Udeshi Rajan Malhotra Sadashiv Nayak
CEO Future Logistics MBA - Finance, B.E. (Mechanical) CEO - Future Media and President Customer Chemical Eng IIT (M), Business Strategy Management IIM (B) Mindshare Fulcrum, Reliance ADAG CEO- Future Brands Business Management-IIM(A) President & COO McCann Erikson
Group Customer Director PGDM - IIM Bangalore, B.Tech. - IIT Bombay Hindustan Lever CEO General Landmark Group U.A.E., Pearl Global, Littlewoods, Merchandising B.Com. (Honours) DCM Ltd. Niryat Sam Apparel, Design Connection, President-Retail Strategy MBA - Kurukshetra University Raymonds PGDM - XLRI Jamshedpur,B.E. (E&C) - KREC CEO - Big Bazaar Surathkal Hindustan Lever Ltd., Asian Paints
Balsara Home Products, Modi Revlon, Procter & CEO - Pantaloons PGDM - IIM Lucknow, B.Tech. - BHU Gamble, Godrej Soaps, Hindustan Lever CEO - Central & Brand MBA - University of Pune, B.Com. Vishnu Prasad Factory Nagarjuna University Arvind Mills PresidentOperations HAND - University of Sussex B.A. Checkers Shoprite (South Africa), Game Discount Kruben Moodliar (Value Retailing) (Economics) - University of Capetown World (South Africa), RPG Retail Chandra Prakash Donear Synthetics Ltd., Orient Vegetexpo Ltd., Toshniwal Chief Financial Officer CA - ICAI, CS - ICAI Control Print India Ltd. Sanjeev Agrawal Ushir Bhatt Executive Board Member Head Corporate Communications M.M.M. (JBIMS) CISCO, TESCO Accenture, Tata Consultancy Services, RPG Enterprises, Jumbo Electronics Dubai, Indian Express
Atul Takle
31 | Page
ANNEXURE IV: Retail Sector Growth Drivers

Favourable demographics
The demographic proposition of the country is shifting year on year. The contribution of working population (15-64 years) is growing. Approximately 63% of population is in the working age group of 15-64 years. According to Census of India 2001 estimates, it is expected to increase to 69% in 2026. This will increase the overall purchasing power of the country propelling growth in the retail industry. Exhibit 47: Share of population by Age
65+ 8% 5% 69% 63% 23% 32% 0% 10% 20% 30% 2006 40% 2026 50% 60% 70% 80%
Highest proportion of population in working age group
Age in Years
15-64
0-14
Source: Census of India 2001 estimates, ICICIdirect.com Research
Increasing income
According to McKinsey Global Institute (MGI), Indian income is expected to triple over the next two decades. Average real household disposable income has increased from Rs 56470 in 1995 to Rs 113,744 in 2005, CAGR of 3.6%. It is expected to grow from Rs 113,744 in 2005 to Rs 318,896 by 2025, a CAGR of 5.3%. With the rise in disposable income, consumers will have more money to spend resulting in higher consumption. According to MGI, increasing household income will contribute 80% to the consumption growth. Exhibit 48: Growing household disposable income
350 300 250 Rs. in '000 200 150 100 50 0 1985 1990 1995 2000 2005 2015 2025 CAGR 3.6% CAGR 5.3%
Average Averagehouseholdhousehold income to grow at CAGR of 5.3% over income to grow at CAGR 2005-15 period of 5.3% over 2005-15 period
Source: MGI, ICICIdirect.com Research
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Rising middle income group

Despite significant progress, India today remains dominated by people living in the deprived and aspirer classes. According to MGI, the middle class currently constitutes just 13 million households i.e. 5% of the population. By 2025, India will transform itself into a nation of strivers and seekers with 128 million households i.e. 41% of the population in the middle class. According to MGI, middle class will expand to the point where it will command 60% of the total consumption by 2025. Exhibit 49: Growing Middle Class
300 No. of Households (Mn) 250 200 150 100 50 0 2005 Deprived (<90000) Strivers (Rs. 500000-1000000) 2015 Aspirers (Rs.90000-200000) Globals (>Rs. 1000000) 2025 Seekers (Rs.200000-500000)
Proportion of middle class to rise from 5% in 2005 to 41% in 2025
Increasing consumption
India has entered into a virtuous cycle in which rising income leads to increasing consumption, creating more business opportunities and employment, further fuelling GDP and income growth. Indias growth has been largely fuelled by domestic consumption (62% of GDP) as compared to Asian peers like China (47% of GDP). Exhibit 50: Domestic consumption as % of GDP
70 55 40 % of GDP 25 10 -5 -20 Net Trade Investment Government Consumption 3 China 14 1 Japan -2 India -6 US 44 57 39 23 28 18 20 12 16 62 70
Private Consumption
The combination of increasing household income (contributing 80% to consumption growth) and growing population (contributing 16% to consumption growth) is expected to increase the overall consumer spending. According to MGI, aggregate consumption in India is expected to grow (in real terms) from Rs 17 trillion today to Rs 34 trillion by 2015 and Rs 70 trillion by 2025, a fourfold increase. India is expected to become the worlds fifth largest consumer market by 2025 from the current twelfth largest consumer market at present.
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Exhibit 51: Aggregate consumption dominating middle class

80 70 60 Rs. Trillion 50 40 30 20 10 0 1985 Deprived (<90000) 1995 2005 2015 Aspirers (Rs.90000-200000) Strivers (Rs. 500000-1000000) 2025 middle class 4.1x
Seekers (Rs.200000-500000) Globals (>Rs. 1000000)

Increasing proportion of working women

The propensity to consume is higher in working women as compared to housewives. According to a report by Technopak India consumer trends 2007, the share of working women is expected to rise to over 20% of the total urban female population by 2020 from 15% currently. The buying behaviour of the working women is different than their counterpart due to higher disposable family income and less availability of time. The working women prefer to go to a one-stop shop for purchasing regular products, which augurs well for organised retailing formats. Exhibit 52: Average Spend: working women vs. housewives
Category Household goods Eating out Music Gifts Mobile phones Computer peripherals
Source: CRISIL Research, ICICIdirect.com Research
Spend 2.2 2 2.5 2.9 3.8 4.1
Increased credit available

The ease of payments (ability to spend without cash) due to the use of debit and credit cards has resulted in increase in total spending. With the launch of easy monthly instalment (EMI) cards and co-branded credit cards, the purchasing power of the consumers has increased tremendously. The use of plastic money, i.e. debit cards and credit cards, has increased significantly over the past three to four years. The value of transactions done through credit cards has increased at a CAGR of 25.7% over FY07-09 period to Rs. 65,356 crore, while that of debit cards increased at a CAGR of 50.7% over the same period to Rs 18547 crore. An anticipated increase in the penetration of plastic cards would provide further fillip to organised retail sales.
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Exhibit 53: Increased usage of debit and credit cards

70,000 60,000 50,000
Rs Crore
65,356 57,984 41,361
40,000 30,000 20,000 10,000 0 FY07 FY08 Debit Card Credit Card FY09 8,172 12,521 18,547
Increased mall space

Malls are being increasingly accepted as venue for shopping and entertainment in the urban areas. It has become a destination where the whole family can shop, dine and have fun. As a result, the number of malls has seen a sudden rise in the past three to four years due to rising income and consumers willingness to spend. According to Images F&R Research 2008, the mall space in the country has increased from 3.7 million sq ft in 2002 to 26.9 million sq ft in 2006 and is estimated to increase to 350 million sq ft by 2015. Exhibit 54: Mall space
400 350 300 250 200 150 100 50 0 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Space Mn. Sq. ft. Growth (%) 140% 120% 100% 80% 60% 40% 20% 0%
Mall space to reach 350 million sq ft by 2015
Source: Images F&R Research 2008, ICICIdirect.com Research
Mn.Sq.Ft
Penetration in Tier 2 and Tier-3 expected to rise

With the approaching saturation of Tier-1 cities and metros and rising competition, retailers are eyeing opening stores in Tier-2, Tier-3 and Tier-4 cities. These cities are plush with high income/high net worth consumers and mall developers are exploiting the potential. Besides the commonly listed Tier-II, Tier-III cities like Indore, Nagpur, Ahmedabad, Pune, Mysore, Kochi, Hyderabad, Sonepat, Lucknow, Ludhiana and Jaipur, there are numerous smaller cities where modern malls are coming up. These nonextinct urban centres that accounted for only 3.57 lakh sq ft of mall space in 2004 are expected to boast of 4.7 crore sq ft of mall space in three years. Organised retailing in small-town India is growing at 50-60% a year compared to the 35-40% growth in the major cities of India. About 200 tierIII cities with a population of less than two million, and another 500 rural towns have the potential to become prominent rural hubs, where organised retailing can effectively set base.
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pankaj.pandey@icicisecurities.com
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December 8, 2009 | Retail

Pantaloon Retail India (PANRET)

Current Price Rs. 350 Potential upside 21.4 %

Target Price Rs. 425 Time Frame 12-15 months

Aggressive space rollout to spur revenue growth

Restructuring to create a pure retail play

Profitable growth the focal point

Comparative return metrics

Price Trend (Rs)

Source: Company, ICICIdirect.com Research

Shareholding pattern (Q1FY10)

Promoter & Institutional holding trend (%)

Exhibit 2: Business Structure

Standalone Core Retailing

Subsidiaries Retail and allied services

Joint Venture Specialty Retail

Lifestyle Pantaloons 46 stores Central 10 stores Brand Factory 8 stores

Value Big Bazaar 117 stores Food Bazaar 38 standalone stores

Source: Company, ICICIdirect.com Research

755 535 410 280 13.6 22.5

500 400 300 200 100 0 2.9 2003

4.4 2008 Retail (LHS) 2013P Penetration (RHS) 2018P

Source: KSA Technopak, ICICIdirect.com Research

PRIL retail space to grow at 22.6%CAGR

Source: Company, ICICIdirect.com Research

Exhibit 6: Format-wise contribution to total space

2.0 0.7 0.4

FY09 1.2 FY08 1.0 FY07 0.7 0

0.3 1.3 0.4 0.3 0.3 0.9 0.3 0.2

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

respondents could choose more than 1 format

Source: KPMG India Retail Survey 2005, ICICIdirect.com Research

Big Bazaar, Food Bazaar to maintain its dominance

Sales (Rs Crore) Share in total retail sales (RHS)

Avg Sales psf (Rs)

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Central to gain maximum share, going forward

Source: Company, ICICIdirect.com Research

Rising share of private labels to improve margins

Gross Margin range 45- 60%

Gross Margin psf (LHS)

Focus on food a big opportunity

Source: Images F&R Research 2007, ICICIdirect.com Research

Launch of private labels in FMCG space to improve margins

Home retailing to gain traction

30 24.6 25 20 632 8.1 5.0 136 Home dcor & furnishing 5 0 15 10 %

8000 6000 4000 2000

6727.2 5868.1 6048.7

Revenue psf (Rs)

Better technology implementation to improve productivity

Improvement in inventory management systems

Better supply chain logistics

1815 1773 1736

Source: Company, ICICIdirect.com Research

Standalone Core Retailing

Subsidiaries Retail and allied services

Joint Venture Specialty Retail

Value Big Bazaar

Home Solutions Retail (66.9% stake) Retailing home products

Staples Future Office Products (37.50% stake) Staples

Central Brand Factory