COMPANY ANALYSIS :

PANTALOON RETAIL (INDIA) LIMITED

Industry Overview:

India is one of the largest emerging markets in the world with the second fastest growing economy. However, the retail sector in India is still at a nascent stage but is definitely showing growth trends. Retailing is one of the important sectors of an economy, both in terms of contribution to GDP and share in the total employment. India’s retail sector is estimated to reach US$ 833 billion by 2013 with a compound annual growth rate of 10% which is quite fascinating. Retail sector of India contributes to about 22% of India’s GDP and employs nearly 8% of the entire employable population.

India has emerged as the fifth most favourable destination for international retailers, outpacing UAE, Russia, Indonesia and Saudi Arabia, according to A T Kearney's Global Retail Development Index (GRDI) 2012. "India remains a high potential market with accelerated retail growth of 15-20% expected over the next five years," highlighted the report by A T Kearney.

Retail sector in India is divided into two types – Organised and Un-organised Retail with Organised Retail forming only 6% of the total retail industry in India. If we compare this figure globally it is around 35% in Brazil, 55% in Malaysia and 85% in USA. Organised Retailing refers to trading activities undertaken by licensed retailers i.e. those who are registered for sales tax, income tax etc. these include corporate-backed hypermarkets and retail chains, and also privately owned large retail businesses. Unorganised retailing, on the other hand, refers to traditional formats of low-cost retailing like the local kirana shops, owner manned general stores etc.

Investments:

- International cash and carry chains in the retail sector plans to expand in India. Waymart, the US$ 446 billion American retail giant, which operates cash and carry outlets in India in a 50-50 per cent joint venture (JV) with the Bharti Group, expects to open 12 to 15 wholesale outlets in 2012

- According to a recent trend, retail companies such as Carrefour, IKEA, Tesco and Wal-Mart are regularly sourcing well-priced, high-quality products for customers in Western markets from India. Analysts estimate that these four retail majors together source around US$ 3.5 billion-US$ 4 billion from India every year. "India continues to be an important sourcing market," as per Wal-Mart

Some of the key Indian Retail issues which are a hindrance to its growth are:

- Agri Produce Marketing Act (APMC) forces famers to sell at Specified Mandi’s through authorized agents or aggregators. A retail outlet has to get licenses from APMC, Municipal authority, and get NOC from Labor, Fire, Environment and various other divisions which become a very tedious job.

- Buying direct from farmers and contract farming are not allowed. Most farmers would prefer to deal with organized retail as they get better prices, easy purchase process and immediate payment terms etc.

- Unlike USA, where customers are willing to drive longer distances and buy large quantities, for Indian consumers proximity is very important.

- Low productivity of labour- Long and inefficient supply chain.

However there is a huge potential for the organised retail sector in India due to the following reasons:

- Urbanization and growth of middle class- Increase in % of working women- Exposure to modern retail experience (Malls)- Increased demand for branded/Processed food- High growth in turnover

Hence it would definitely be profitable to take some policy measures and give a boost to this emerging sector. One such measure which would have proved useful for the development of this sector was to allow FDI in multi-brand retail which has now been put on a hold. Some of the potential impact these measures could have on the retail sector are as follows:

- Infusion of cash for cash intensive business- Infusion of technology and practices- Partnership with Indian players- Boost to Indian suppliers.

Some of the other actions that the government can take to help this sector grow can be in the form of:

- Amendment of the APMC Act- Implementation of Goods and Service Tax which would simplify taxation- Infrastructural development in forms of better road, infrastructure better distribution

facilities, facilities for cold storages etc.

Major Retailers in India:

Pantaloons Retail Limited Reliance Retail Limited Aditya Birla Retail Limited Bharti Retail Limited Tata Group Spencer’s Retail Limited

Types of Organized retail formats:

Supermarkets & Convenience stores

Department Stores

Hypermarkets

Cash and carry

Specialty stores

Single brand Exclusive stores

Discount Stores/Factory outlets

SWOT Analysis of the Indian Retail Sector:

STRENGTHS:

- Increasing demand driven by country’s young working population- rising disposable income- technology intensive industry- Major contributor to GDP- High potential

WEAKNESSES:

- Shortage of quality retail space at affordable rates- Long and inefficient supply chain- Government restriction on FDI- Stringent labour laws.- Highly unorganised

OPPORTUNITIES:

- Increase in the spending middle class population- Untapped rural markets- Upcoming international players- Infusion of capital and technology due to FDI

THREATS:

- Indian taxation system favours small businesses- Competition among organized and unorganized sector- Poor monsoons and low GDP growth could affect consumer spending drastically.

PEST Analysis of the Retail Sector:

Political Factors:

- FDI in multi brand retail still nor permitted- Some political parties are quite offensive towards the growth of organised sector to

protect small unorganised retailers- Tax structure is unfavourable. Implementation of Goods and Service Tax (GST) is still

pending

Economic Factors:

- Increase in per capita income favourable for growth- Slowing growth in the last one year might prove a hindrance- High inflation holds a negative impact for the growth of this industry

Social Factors:

- The majority of the Indian population is below is below 36 years of age which is the major contributor to the growth of organised retail sector

- Consumers today also look out for easy shopping which again is a positive factor for the organised sector

Technological Factors:

- Some of the technological factors contributing to the growth of retail sector are online shopping, customer relationship management, supply chain management, online goods and inventory tracking system etc.

Porter’s Five Force Analysis:

Threat of New Entrants:

- FDI approval will result in rise of organised retail- Barriers to entry are low in this sector is low since mostly it is unorganised retail- Foreign entrants will have to comply with government regulations which acts as a

deterrent

Bargaining Power of Buyers:

- Large number of customers, hence bargaining power is low

Bargaining Power of Suppliers:

- High competition among suppliers, hence bargaining power is less- Low cost of switching suppliers

Threat of Substitutes:

- Chances of shifting to other products is very high- A retailer has to keep multiple options of same product line - Consumers don’t differentiate much between different alternatives, instead go which is

cheaper

Competition:

- Cut throat competition since a kirana shop can be found in almost every locality- Entry of foreign players will increase the already high competition.

Pantaloon Retail (India) Limited

Pantaloon Retail (India) Limited is one of India’s leading retailers. It is part of the Future Group which was founded by Mr Kishore Biyani. Future Group mainly operates in three business areas – Retail, Allied Services and Finance. Pantaloon Retail Limited serves its customers in 85 cities and 60 rural locations across the country through over 15 million square feet of retail space. The company has its headquarters in Mumbai and employs around 35000 people. The net increase in retail space during the year was 2.26million square feet, taking the total operational space to 15.24 million square feet. The company also owns 65 warehouses spread across 3.6 million square feet of operational warehouse space.

The company operates in multiple retail formats in both value and lifestyle segment of the Indian market. 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, Depot, Shoe Factory, Brand Factory, Blue Sky, Fashion Station, aLL, Top 10, mBazaar and Star and Sitara. The company also operates an online portal, futurebazaar.com. A subsidiary company, Home Solutions Retail (India) Limited, operates Home Town, a large-format home solutions store, Collection i, selling home furniture products and E-Zone focussed on catering to the consumer electronics segment.

Company History:

The company was incorporate as Manz Wear Private Limited in 1987. The company was converted into a Public Limited Company in the year 1991 and thereafter the name was changed to Pantaloon Fashions (India) Limited. Then in the year 1999 the name of the company was changed to Pantaloon Retail (India) Limited.

The following is a chart showing the different types of businesses operated by the Future Group.

Company Board of Directors:

Chairman

Shailesh Haribhakti

Managing Director Kishore

Biyani

Promoter & Non-Executive

Director

Gopikishan

Biyani

Chief Executive Officer Kailash

Bhatia

Joint Managing Director Rakesh

Biyani

Independent Non-Executive

Director

Darlie Koshy

S Doreswamy

Anil Harish

Bala

Deshpande

V K Chopra

Whole Time Director Vijay Biyani

Company SecretaryDeepak Tanna

Statutory AuditorsNGS & Co

Risk AdvisorsErnst & Young Pvt. Ltd

Company Headquarters:

Pantaloon Retail (India) LimitedKnowledge House, Shyam Nagar, Off Jogeshwari-Vikhroli Link Road, Jogeshwari (East), Mumbai 400 060

Tel: + 91 22 3084 1300Fax: + 91 22 3084 2201

WEBSITEwww.pantaloonretail.in

Company Shareholding Pattern:

The Shareholding Pattern page of Pantaloon Retail (India) Ltd. presents the Promoter's holding, FII's holding, DII's Holding, and Shareholding by general public etc.

Shareholding pattern - Pantaloon Retail (India) Ltd.

Holder's Name No of Shares % Share Holding

Promoters 94145418 43.66%

Foreign Institutions 47920410 22.22%

Other Companies 27912429 12.94%

General Public 19223670 8.91%

Others 11272341 5.23%

NBanksMutualFunds 9238376 4.28%

Financial Institutions 5796634 2.69%

Foreign NRI 106561 0.05%

Directors 37600 0.02%

BANKERS

- Bank of India- Axis Bank Ltd.- Andhra Bank- Corporation Bank- HDFC Bank Ltd.- IDBI Bank Ltd.- State Bank of Travancore- UCO Bank- Standard Chartered Bank- The Federal Bank Ltd.- Union Bank of India- Bank of Baroda- Allahabad Bank

FINANCIAL ANALYSIS

Important Figures for fiscal year 2010-11:

- 24.8% growth in turnover- 85.96% growth in Profit after Tax (PAT)- 105.7% growth in Earnings per Share (EPS)- 27% growth in Pantaloons sales during the year- Company announced a record dividend of Rs. 0.90 (45%) on equity shares with face

value of Rs. 2- The core retail business of the company grew at the compounded growth rate of 31.84%

during these last three years.- The year on year same-stores-sales growth in lifestyle segment was 15.56%, value

segment was 10.31%, and in home segment was 8.32%.

Comparison of some important Financial Data for past 3 years:

2009 2010 2011Net Sales 7669 9787 12212EBIDTA 609 952 1204PAT -6 76 142EPS 0.56 3.18 6.54

The above data clearly shows that the company is continuously improving its business.

Revenue Mix:

Outlet % of Total SalesBig Bazaar and Food Bazaar 70Pantaloons 13Central 12Others 5

Hence, most of the sales of Pantaloon Retail Ltd. Comes from Big Bazaar and Food Bazaar which is now a part of Future Value Retail, a wholly owned subsidiary of Pantaloon Retail (India) Limited.

Ratio Analysis:

Current Ratio – 1.84 Quick ratio – 0.44 Debt-equity ratio – 1.60 ROCE – 14.38 %

Notes:

- Ideal Current Ratio should be 2:1. In this case the company’s current ratio is less than 2:1 which indicates that the short-term financial position of the company is not very sound.

- Also a weak quick ratio which ideally should be 1:1 validates the above statement.- Debt-equity ratio normally should be 2:1. But here a low ratio shows that the the

company has substantial amount of proprietor holdings- ROCE ratio of the company is good which indicates that the investor’s money is earning

good profits.

Pantaloon Retail Limited has however shown a down trend in its business particularly in the financial year 2011-12. Some of the details that validate the above observation are as follows:

- 11th Nov, 2011 - Pantaloon Retail has posted consolidated net profit of Rs 150.5 million for the quarter ended Sept. 30, 2011 as compared to Rs 236.4 million for the quarter ended Sept. 30, 2010, representing a decrease of 36.34%.

- 10th Feb, 2012 - Pantaloon Retail, the country`s largest retailer has posted a substantial drop of 71.67% in net profit to Rs. 56.40 million for the quarter ended December 31, 2011 as compared to Rs. 199.10 million for the quarter ended December 31, 2010.

- 15th May 2012 - Pantaloon Retail reported a consolidated net (loss) of Rs. (0.60) million or (6 lakh) for the quarter ended Mar. 31, 2012 as compared to net profit of Rs. 40.90 million for the quarter ended Mar. 31, 2011

Recent Happenings:

Pantaloon Retail Limited to demerge “Pantaloon” format stores: The Company has announced demerger the flagship “Pantaloon” retail format store from the listed entity. It will also transfer a debt of Rs 8 billion to the demerged entity. Aditya Birla Nuvo will invest Rs 8 billion in the demerged entity by subscribing to debentures issued by Pantaloon Retail. The debentures, in-turn, will get converted into equity in the demerged entity on completion of the demerger process. AB Nuvo will also make an open offer of 26% for the demerged entity. As per AB Nuvo, post completion of listing as well as open offer process, it will hold minimum 50.01% in demerged entity; effectively become a subsidiary of AB Nuvo.

Strategic rationale for the transaction: The deal helps Pantaloon Retail Limited to reduce its Core Retail debt by Rs 16bn. Core retail debt stood at Rs52bn as on Dec’11 and has been a key overhang for the company’s stock. For Pantaloon, this transaction helps in reducing interest costs by approximately Rs 1.8-2bn, assuming interest rate of 11-12%.

Other Recent News:

Pantaloon Retail sold a 4 % stake in the company for 2 billion rupees to Bennett, Coleman & Co Ltd, which owns the country's biggest-selling English newspaper, through the issue of 8.16 million preferential shares at 245 rupees a share.

15-JUN-12: Pantaloon Retail (India) has announced on Thursday that i the Committee of Directors of the Company at their Meeting held on June 14, 2012, have made allotment of 800 optionally fully Convertible Debentures (OFCDs) of Rs 1,00,00,000/- each aggregating to Rs 800,00,00,000/- to Peter England Fashions and Retail Ltd owned by Aditya Birla group

Pantaloon Retail (India) Ltd has informed BSE that the Board of Directors have passed a resolution by circulation for extending the financial period of the Company by six months from June 30 to December 31. Accordingly, the current financial period shall be a period of 18 months beginning from July 01, 2011 and ending on December 31, 2012.

Pantaloon Retail Limited also announced that it plans to change its name to Future Retail (India) Limited.

The company has booked more than 9 million square feet of prime spaces in India’s largest cities.

Pantaloon Retail is planning to exit its joint venture with the world's largest office products firm Staples Inc. by June 2012 which could fetch the Indian retail giant, part of the Future Group, Rs. 200 crore, said two analysts.

Strategic Alliances:

Jet Airways ties up with Future Group: In a bid to attract more customers and provide exclusive offers to current members, Jet Airways has partnered with Future Group. Jet Privilege members can now earn one JPMile for purchase of INR 100 and above at each of the EZone stores or online at futurebazaar.com.

Clarks sets up first India store in JV with Future Group: Clarks Future Footwear, a 50:50 joint venture between PRIL and UK-based footwear company Clarks, opened its first exclusive retail store in New Delhi in Q3FY11. The joint venture, which will import 70% of the stock from its UK facilities, is targeting sale of 1 million pair of shoes in the first two-three years of operations in India. The balance stock will be sourced from third-party suppliers based in Chennai to be retailed across the country.

Hero Cycles announces strategic tie-up with PRIL: The world’s largest bicycle manufacturer Hero Cycles announced a strategic tie up with PRIL’s sports division. This association will enable Hero Cycles to display its merchandise and make its new range of premium bicycles available across Planet Sports and its shopping shop formats within Central, Pantaloons, Brand Factory and Sports Warehouse across all metros and tier I cities.

Using Big Bazaar channel to drive Nano sales: Tata Motors has tied up with the Future Group to sell the Nano in Big Bazaar outlets. This is the first time a retail chain is selling a car in the country and market experts believe the decision to tie up with the country’s largest retailer is a brilliant move which could help Tata Motors push Nano sales.

SWOT Analysis:

Strengths:

- Pioneer in the industry- Largest market share and capitalization- Presence in major cities- Competitive pricing- Understands the taste of Indian consumers.- Large variance under on roof

Weaknesses:

- No international presence- Operates across many product lines due to which it lacks specialization in some of the

areas- Rising debt

Opportunities:

- Huge untapped market- Organized retail is still to establish in India- Can enter into international markets- Entry in rural areas

Threats:

- Entry of foreign players could disturb its market share- Price wars between competitors- More no. of players is now entering into this sector.- Macro-economic slowdown

Financial Comparison of Leading Indian Retailers:

Peer Comparison

CompanyMarket Cap(Rs. in Cr.)

P/E (TTM)(x)

P/BV (TTM)

(x)

EV/EBIDTA(x)

ROE(%)

ROCE(%)

D/E(x)

Pantaloon Retail 4,399.45 109.83 1.51 19.21 2.8 6.7 0.63

Bombay Rayon 3,257.32 15.79 1.11 11.36 9.9 8.4 1.22

Page Industries 3,196.43 38.32 19.28 19.58 62.2 73.6 0.18

Shoppers St. 3,185.06 50.21 4.84 20.43 10.2 18.1 0.08

Trent 2,940.14 78.41 2.19 34.44 3.3 2.9 0.18

Raymond 2,310.65 47.89 2.09 10.37 4.7 10.1 0.75

Rupa & Co 1,113.00 26.82 5.85 0.00 21.1 20.5 1.01

Mandhana Indus 775.01 10.60 1.84 8.70 24.5 17.7 1.78

Kewal Kir.Cloth. 658.61 13.72 2.92 8.44 24.6 36.5 0.00

KSL and Indus 598.51 0.00 1.43 6.84 -0.6 5.0 1.85

Lovable Lingerie 554.32 25.60 3.49 19.25 17.1 23.3 0.00

Welspun India 474.24 3.28 0.61 12.56 -15.7 1.8 2.64

K P R Mill Ltd 418.81 13.41 0.71 5.25 12.7 10.9 1.00

Zodiac Cloth. Co 358.23 34.88 2.18 13.90 11.2 13.0 0.23

Trident 286.57 0.00 0.44 5.35 11.7 9.0 3.51

Notes:

- Pantaloon Retail Limited is still the biggest company by market capitalization- The company’s ROCE ratio is average- However, the company’s P/E Ratio is very high compared to its peers which suggests

that the company stock is over-priced as compared to its competitors- Also, the company’s ROE ratios is the least compared to most of its competitors, which

indicates that the company is not in a good position while most of its competitors are having a good position

- Hence we can conclude that although Pantaloon Retail Limited is still the market leader, but in the present scenario its competitors are faring much better and that the company would have to take certain steps to again get into competition.

References:

- http://www.pantaloonretail.in/

- http://www.ibef.org/industry/retail.aspx

- http://myiris.com/shares/company/writeDet.php?icode=panfasia#fut

- http://articles.economictimes.indiatimes.com/2012-03-01/news/31113750_1_kishore- biyani-rakesh-biyani-joint-venture

- http://www.indiainfoline.com/Markets/company/Pantaloon-Retail-India-Ltd/523574

- http://www.bseindia.com/stockinfo/anndet.aspx?newsid=122B63BA-9301-4E3A-9260- 5510AC5B1F9C&flag=I&type=A&scrip_CD=523574

- http://www.moneycontrol.com/stocks/stock_market/corp_notices.php?autono=563859

- Edelweiss Research (www.edelresearch.com)

- Research Report by Prabhudas Lilladher Pvt. Ltd.