Stock Review: PANTALOON RETAIL INDIA

Pantaloon's decision to sell its stake in Future Capital Holding (FCH) reaffirms its key priority to restructure its business. The company will use the proceeds for debt repayment and for core retail business.

Over the years, Pantaloon Retail India (PRIL) has diversified into non-core, non-retail businesses with almost 35% of its capital blocked in the unrelated business. These unrelated businesses include financial services, insurance joint ventures, ecommerce, media and logistics. The company has invested around . 1,200 crore into these unrelated businesses in the past four years.

The ventures, most of them unprofitable, have impacted Pantaloon's overall profitability. Also, its return on capital in FY10 was barely one. The debt-equity in FY10 was 1.5, which is high relative to the leverage levels in the retail industry. To address such concerns, the company has decided to hive off non-profitable businesses.

PRIL has taken certain steps in this direction in the past few months. It has separated Future Capital Holdings and the insurance business into a separate holding company. A further stake sale in FCH will strengthen the company's balance sheet, allowing future expansion of the retail business.

In the last fiscal, FCH's net sales was . 373 crore and the net profit was . 49 crore. It has a market capitalisation of . 950 crore. At its current market valuation, Pantaloons Retail will get around . 510 crore from the stake sale.

Other than the restructuring, the company also plans to increase its profitability through expansion of its retail business, partly by space addition and partly by stores addition. These plans will be funded through a mix of internal accruals, cash received from divestments and debt.

The company has high inventory days. To address this, it will focus more on food and grocery business, as it is less capital-intensive with lower inventory days as compared to apparels and electronics, but has lower margins. The company expects its operating margins to be around 8-9%. Given this gradual restructuring, the company's financials are expected to improve in the coming years.