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[Lavanay]

PANTALOON RETAIL INDIA
CMP: 480
Rating: Buy

India’s leading retailer with proven execution track record Pantaloon Retail India (PRIL) is India’s largest retailer with over 6.5 mn sq ft of retail space under a range of formats. Over the past five years, the company’s retail space has expanded 14x and revenues have grown at a CAGR of 63%.

Presence across consumption categories captures larger wallet share PRIL has established strong presence across multiple consumption categories in a bid to capture maximum consumer wallet share. It has widened its format offerings from a single format Pantaloons to over 15 formats which capture almost 75% of the consumption basket.

Aggressive expansion plan to drive growth; 56% CAGR in retail space We expect the company to operate 8.6 mn sq ft of retail space by FY08E, 12.5 mn sq ft by FY09E, and 18.8 mn sq ft by FY10E at a standalone level. We expect this space addition to drive revenue CAGR of 62% over FY07-10E.

Successfully leveraging retail platform to diversify into ancillary businesses PRIL has successfully incubated allied businesses derived from the retail business or support the core business. It has incorporated subsidiaries like Future Media, Future Logistics, Future Bazaar, Future Capital Holding (FCH), Future Ventures, and Future Knowledge Services, whose business models are designed to capitalize on the 30 mn sq ft of retail space that PRIL will have by FY12E.

Outlook and valuations: 26.5% upside at SOTP of INR 704; initiating with `BUY’ We have valued PRIL on an SOTP basis at INR 120.5 bn to capture value from its subsidiaries. We have valued the retailing businesses using DCF to even out the near term cost escalations and space delays. To value the unlisted subsidiaries, we have used stake sale benchmarks in absence of data regarding their business and growth plans. Future Capital has been valued at current market price of INR 842 with a 30% holding company discount.

We believe, PRIL has the ability to create significant value with its large scale of operations and proven execution track record. Adjusting the CMP of INR 557 for the value of subsidiaries, the standalone retailing business trades at 55.0x FY08E EPS of INR 6.5, 35.5x FY09E EPS of INR 10.0, and 23.5x FY10E EPS of INR 15.2. We initiate coverage with a `BUY’ recommendation.

[dudette]

Looks good

Infact whole Retail Opportunity is Huge

As per recent report by Edelweiss

Retail is expected to grow at 8.6% CAGR to USD 453 bn, driven by 9% GDP growth over 2007-11E
The size of the Indian retail industry was pegged at~USD 300 bn in 2006, accounting for nearly 39%
of GDP and almost 62% of private final consumption expenditure (PFCE). The retail landscape in India
is gradually evolving with interplay of several factors ranging from demographic to economic ones. We
expect the retail industry to reach a size of USD 453 bn by FY11E, fuelled by the Government of India’s
(GoI’s) increasing focus on achieving 9-10% growth in GDP, and the growing consumer income level
and aspirations.

Incumbent Players Well-Placed to Retain Upper Hand

In the growing organised retail market in India, we believe that the present domestic retailers have an upper
hand by virtue of their established presence. These players will be better placed than the foreign players or
even other domestic players who will enter the market subsequently. This head-start, driven largely by the
FDI restriction, has placed the domestic retailers at an advantageous position. They will have access to the
best markets at the perfect time to establish themselves and gear-up for the competition.

• Early entry into the most lucrative catchments
• Benefits of early entrant in terms of best retail locations and rentals
• Cushion of lucrative markets to aid expansion into tier II and IV cities
• Better brand recall
• Bulk sourcing benefits and economies of scale
• Investments in IT infrastructure and supply chain viable due to scale
• Creation of entry barriers for subsequent entrants
• Ability to handle competition better