Pantaloon Retail (PRIL) has announced sale of 53.67% stake in Future Capital Holdings in two tranches to Warburg Pincus.
In the first tranche, PRIL will sell 40% of its stake at R162 a share, and will continue to hold 13.67% in FCH which they are likely to offload via open offer. This comes in a move to deleverage its balance sheet by selling stake in its non-retail assets which will reduce its burgeoning debt. With the exit from Future Capital, we believe PRIL will benefit from reduced interest expenditure and focus on its core retail business; and would also be looking for a partner for the same. However, slow same-store (SS) growth (compared to peers like Shoppers Stop), high debt and higher inventory days remain key concerns. We maintain hold rating on the stock.
The deal would reduce debt of consolidated entity by R3,600 crore (debt in the books of Future Capital). Also, the consideration received from this transaction will be utilised to reduce core retail debt. In Q3FY12, PRIL paid over 90% of its EBIT as interest expense in its core retail business, causing profit to decline 76.2% y-o-y.
Demerger and subsequent sale of Pantaloon’s retail format to Aditya Birla Nuvo will help reduce debt by R1,600 crore. Further, PRIL raised R200 crore by issuing 8.16 million shares to Bennett, Coleman & Co at R245 on preferential basis. We expect the core retail debt to reduce to approximately R3,000 crore (R5,100 crore in December 2011) over the coming quarters.
We are encouraged by the deleveraging exercise and would seek more clarity on debt position. At current market price, the stock is trading at 36.9x FY12E and 27.5x FY13E EPS. We recommend ?sector underperformer? rating on a relative return basis.