Valuation issues, FDI delay take lustre off Pantaloon

The news report front-paged by The Business Standard on the government putting FDI in multi-brand retail on the backburner has knocked Pantaloon Retail of its feet. The impact was visible as the stock has fallen by nearly 7 percent. At 1 pm on Wednesday, the stock was trading at Rs 258.70 against a close of Rs 278.10 on Tuesday. The stock touched an intra-day low of Rs 253.10.

[caption id=“attachment_83938” align=“alignleft” width=“380” caption=“Pantaloon has a debt load of Rs 4,570 crore for the financial year 2011. AFP”]  [/caption]

The report says that the government is likely to take a call on the matter only in the next financial year. No concrete action has been taken to push the proposal to the Union Cabinet for approval after the Committee of Secretaries (CoS) on 22 July recommended that 51 percent FDI in multi-brand retail be allowed.

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The apparent policy inertia is doing no good as it’s affecting the overall business sentiment. The report states that the government is under pressure from many quarters and it is not in a mood to open a new front.

Pantaloon stock also took a hit after news reports suggested that the group has not been able to sell a stake in its financial services arm, Future Capital Holding, due to differences in valuation. The Kishore Biyani-promoted Group has been asking for a valuation of Rs 2,000 crore, which is two and a half times its book value of Rs 700 crore. Potential investors, the report said, are willing to settle for a valuation of Rs 1,200 crore to Rs 1,500 crore.

The financial mess Pantaloon Retail finds itself in will only get worse with this FDI uncertainty. Pantaloon has a debt load of Rs 4,570 crore for the financial year 2011. Servicing the debt eats away more than half its profit before interest and tax (EBIT). Against an EBIT of Rs 990.2 crore, the company pays an interest component of Rs 493 crore.

With the company’s saleable area likely to grow from 15.1 million square feet in financial year 2011 to 17.2 million square feet in 2012 and to 20 million square feet in 2013, the company will need more funds to sustain its growth momentum. The company is looking at meeting this shortfall through FDIs. With this option unlikely in the short to medium term, the company will have to look at other innovative sources of funds.