Little value to unlock

Updated: Nov 13 2005, 05:30am hrs
Retailing in India is gaining ground on the back of rising income level, changing demography, improving population mix and government's initiative on the FDI front which has led to high valuation to this sector.

Piramyd Retail Limited (PRL), a part of Piramal group, is one of the bigger player in organised retail with presence in lifestyle and food, home and personal care segments. The company is currently having 13 stores in both these segments spread in 5 cities occupying around 2,60,000 square fit of retail space. PRL markets its products through "Trumart" stores.

PRL was incorporated in March 2005, and it took over the retail business of its two group companies Piramyd Retail and Merchandising Pvt Ltd and Crossroads Shoppertainment Pvt Ltd. The combined financial for the year ended 2005 have registered a sales turnover of Rs 53.6 crore showing a growth of 41.79% as compared to Rs 37.8 crore in the corresponding period last year.

The combined profit and loss account has continuously shown net losses in last three years. For the year ended March 31, 2005, the losses have gone up by 7.14 % at Rs 10.5 crore as against the Rs 9.8 crore in the corresponding period last year. On the operating front, PRL has shown EBITDA margin of 0.5% for the period June ended 2005, which is very less compared to the other players in the industry.

The company, through its initial public offer of 9 million shares, plans to raise around Rs 130 crore and intends to use the proceeds for capital expenditure and deposit for setting up new stores in both the segments it operates, which is expected to be at Rs 118.76 crore.

The part of the issue will be used for upgradation of technology and repayment of bridge loan for Rs 6 and Rs 30 crore respectively.

Piramyd is one of the well-recognised brand in retailing in India. However the company has low visibility and limited presence in certain cities only, as compared to the other players in the industry. The company is now focussing on rapid expansion to garner the higher revenue in the future, it has plans to add 8 new lifestyle retail stores and 37 new home and personal care product stores by the end of financial year 2007.

In the last couple of year, corporates have invested heavily in advertising and building brands. Overall, the sales and promotion expenditure have shown a jump of more than 50% in the last year 2005 for the retailing industry. On the consolidated basis for the year 2005, PRL's sales and distribution expenses has shown a growth of 42.77% at Rs 2.47 crore.

As retailing is still not recognised as a separate industry in India, retailers find it difficult to borrow funds at cheaper rate. PRL as on June 2005 is having a net worth of Rs 1 crore and fixed assets at Rs 39.37 crore, which indicates that the company is currently operating on small base, and heavily betting on its expansion plans.

Thus a lot will depend on speedy and successful implementation of these growth plans as well as the availability of the additional capital resources required to achieve future expansion plans.

Valuations

Given the huge growth potential, companies in this sector are commanding higher valuations, the sector commands the highest P/E of 114. The size of the retailing industry is expected to be around Rs 9,30,000 crore out of this organised retailing is around 35000 crore.

PRL for the six month ended June 2005 have generated RONW at 0.41%, while the EPS stands at Rs 0.04 and book value per share stands at Rs 10.04. At a price band of Rs 120-140 per equity share the issue has been priced at considerably high valuations.