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Saturday, May 23, 2015

GTS - 9 ANSWER - PANTALOON FASHION & RETAIL LTD - A BLUECHIP IN MAKING ?



 
 







 










  

Be it Apple, Microsoft, Nestle or P&G ,  If we closely track the history of huge wealth creating stocks around the globe, in majority  cases we can find out one common factor – the company owns or entitled to use one or more  successful brands. Indian market is not an exception . We have many examples like Page Industries ( Jockey), Jubilant Foodworks ( Dominos) ,Eicher Motors ( Royal Enfield) , Whirlpool ,Laopala ..etc. The new kid on this block is Pantaloon Fashion Retails. Ltd. Let us look into this which I consider as a true multi bagger in making for long term investors.

                                 It came into existence by joining the fashion arms of  erstwhile Pantaloon Retail and Future Ventures .By virtue of its name ,many investors still considering PFRL as a company belongs to the debt ridden future group led by Kishore Biyani.But in reality , now this company belongs to Kumar Mangalam Birla led Aditya Birla Group . Earlier Biyani sold it to Aditya Birla group in an  effort to pare the debt of his future group.

                                                                         What make this loss making company suddenly attractive is the scheme of arrangement announced by Aditya Birla Group few days back.To  consolidate all its branded apparel business into a single entity AB Group now bringing many super brands under PFRL’s fold. It will de-merge Madura Fashion (the branded apparel retailing division) and Madura Garments Lifestyle (luxury branded apparel retailing division) and merge them with Pantaloons.This scheme of arrangement will bring many undisputed brands in premium apparel segment with this company which includes - Louis Philippe, Van Heusen, Allen Solly, People, Hackett London , The Collective ,Peter England ..etc. I don’t think any extra explanation is needed to describe the success of these brands in our market and hence not wasting time for that .

                                                                     When we consider any business depends on brands , we should look into the ownership of brands too . If such a company loose its brand in any circumstances , the entire business may collapse and hence some understanding about this part is very important for an investor. As you are aware Page industries is not the owner of Jockey brand but they are using that brand name as an exclusive licensee of Jockey Brand products from Jockey International Inc till 2030. Like  this ,Jubilant Foodworks using Dominoz brands through an exclusive franchise agreement with Dominos International which is valid till 2025. Why I bring these examples here is just to point out the fact that these agreements are made with a time frame and it should be renewed thereafter for another fixed period, time to time.Though chances are rare for a termination , we can’t rule out possibility for introduction of more  and more covenants by original brand owner at the time of each renewal. Even in some rare cases, relation between both parties may go beyond this and ends in never ending disputes.The recent incident of the dispute between the owner of McDonald brand and one of its Indian franchise owner Mr Vikram Bakshi is one best example for such unfortunate incidents.In this back ground let us look into the brand ownership scenario of some of its major brands viz- Louis Philippe, Van Heusen, Allen Solly and Peter England . Louis Philippe is a brand currently owned by Madura itself.Van Heusen is originally owned by Philips Van heusen company ( US )  but Madura owns the perpetual right to use this brand .The world rights of Peter England brand acquired by Madura in 2000. The brand ‘Allen Solly’ is originally started by a company named ‘William Hollins & Company’ in 1744  and Madura Garments taken over this company in 1990.In nutshell , uncertainties surrounding the ownership and usage of PFRL’s  ( on completion of scheme of arrangement) major brands are nil or less compared with brands of many of the highly flying listed players like Page or Jubilant.( I believe brands like Louis Philippe, Van Heusen, Allen Solly , Peter England..etc  are equal or above the brands of mentioned other companies in their respective category .More than that when others own one good brand ,here in this case all these four brands are extremely strong .Existing brands of Pantaloon ( Byford,Factor,annabelle..etc..etc) will continue in this company itself.In addition to this branded apparel manufacturing ,the combined entity will own a retail network of 1,869 stores across India and a strong e-sale platform - http://www.trendin.com/ .
The First  reason for investors and analysts apathy is the current loss and debt position of PFRL.At present, PFRL’s debt is almost Rs.1085 Cr and Debt to EBITDA ratio is  28: 1.I am accepting the fact that any investor taking investment decisions after analysing the equations and numbers will avoid any company with such a Debt to EBITDA ratio  . But if we closely look at the possible Debt to EBITDA  post merger of Madura units , it will sharply improve from 28:1 to 3.8:1. From the present huge loss, PFRL will turn into a strong company with Rs.400 Cr( approx) pre-tax free cash flow on merger. Company has said , on completion of restructuring  it would invest Rs 450-500 crore  for the next three years, to add 250-300 Madura Garments stores and 25-30 of Pantaloon stores.

Management already announced their decision to change the combined  entity’s name from Pantaloon to Aditya Birla Fashion Retail ( ABFR) .This will help for an image makeover from the chequered past of Pantaloon( due to debt related issues) under previous management and remove the misunderstanding of Investors about the ownership of this company. In a press statement ,Group Chairman Mr.Kumar Mangalam Birla  claimed  “The new company will be the largest  branded apparel player  in India not only in the listed  but also in the non-listed space," .

Another confusion is about valuation of stock post expansion of equity .As you are aware ,companies with market leadership position with  excellent brand and decent growth will always trade at premium valuation at high P/E multiples  .( I remember ,99 % analysts suggested to skip Jubilant foodworks  IPO when they offer shares @ Rs.145 in 2010  citing higher valuation at that price.). Considering the current financial data of listed company ( Pantaloon) and the companies to be merged with Pantaloon , I hope the new combined entity will report an EPS of Rs.6.50-7 on completion of merger . Having said , this will be India’s largest branded apparel player and deserving premium valuation. Brand recall of Its super duper brands – Louis Philippe, Van Heusen, Allen Solly and Peter England- is NOT a tad below the single brand of Page Industries . The most important factor is,these brands are showing very high growth rate and Madura Lifestyle’s  sales have grown at a CAGR of 27% from FY10 to FY14. In addition to this, company already announced its plans to open 100 Madura Garments stores and 10 Pantaloon stores in every year for next three years. Operational synergies and cost savings from merger is expected to reduce the loss of Pantaloon division going forward and excellent cash flow of Madura divisions will help to ease the debt pressure of combined entity . As a combined entity ,cost saving opportunities are also possible in case of sourcing , technology,real estate ..etc.Now let us look into the P/E multiple of few listed companies who own market leading brands and  business depends on consumer spending . See below Table :
 
                                 # P/E of PFRL calculated based on the expected EPS post scheme of arrangement        
                                                           Click on the image for better view
  Even if the given small companies( by turnover ) is not strictly comparable with Aditya Birla Fashion Retail Limited - ABFRL ( proposed name of merged entity) , considered the same for arriving a fair comparison in case of P/E multiples. Even the turnover of Page industries will be only a fraction of the turnover of ABFRL once the merger process completes. 
Having said, the brands owned by Page and Jubilant ..etc  not even owned by them( franchise of brands owned by foreign companies upto a fixed time with renewal option) where there is no uncertainty regarding the brands owned by ABFRL which is either owned brands or with perpetual rights . Aditya Birla groups financial muscle and reputation is another factor to keep in mind while comparing with others . Brand extension possibilities to other fashion accessories is another possibility. Company already selling products like Footwear, Belt,wallet..etc under its popular brands . Creating succefull  sub brands is also a possibility and they started the same with Allen Solly Junior . All together ,I believe AB group is capable enough to handle the debt position and will find out a way to improve return ratios going forward once the merger process is complete . There is no reason to get a below average P/E for a company like this which own four super brands (Louis Philippe, Van Heusen, Allen Solly and Peter England) ,along with  2000 retail outlets pan India and a robust CAGR .Merger process is expected to complete in this financial year itself .

With excellent brands , high potential fast growing  business , financial muscle and business acumen of Aditya Birla group , I believe , few years from now ABFRL ( now Pantaloon Fashion Retail ) will grow as the feather in the cap of Aditya Birla Group and it is one  future blue chip in making .Being a long term investor ,I am taking it as a  rare opportunity to grab a high potential company in Indian fashion space at its beginning stage and comfortable to buy  even at this price .Suggesting my readers to take a call based on own conviction .Stock (PFRL)  listed in both exchanges and trading around Rs.195
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# This report prepared in anticipation of   smooth completion of Scheme of Arrangement as per the terms and conditions announced by both companies. 
Disc: Holding shares in PFRL  
Link to the website of Madura fashion & Lifestyle HERE
Related news links below 

 1 ) Pantaloon Fashion Retail a better bet than AB Nuvo for investors

 

2)  Latest Investor Presentation 

 

3  ) Aditya Birla Group merges apparels business

 
 
 
 
 
 
 
                            
         

Friday, May 22, 2015

GTS - 9 UPDATE

Around 900 mails  received from my readers with answeres for GTS -9 and almost 80 were correct . As mentioned in previous posting , below are the name of readers sent correct answer on day -1

1) NITIN KHANNA
2) ANAND PATEL
3) ABHAYA KUMAR
4) KRISHNA REDDY
5) HIREN SAMANI
6) DINESH AGARWAL
7) RAVI
8) DHARMESH HARIA
9) MANOJ G
10) PAVAN BHAT
11) NAGARAJAN T
12) RAVI KUKREJA
13) BASIRUDEEN
14) PRASANT KUMAR
15) HIREN KAMANI
16) MAYUR NARSUDE
17) NAVIN R
18) GITA OONKAS
19) MUKUND
20) VENKATESH SANKEPU
21) RAMESH BAJAJ
22) SHAMEER MK
23) PREM DOSHI
24) GAJENDRAN GAJA
25) BAJU KATTAKATH
26 )  SACHIN SHERKAR
27) SANTOSH RAJU
28) JAYAPRAKASH CHECHANI



Congratulations to all  for your hardwork, not only for those who identified on day one but also on subsequent days .





Wednesday, May 20, 2015

SKM EGG PRODUCTS EXPORTS - RESULT UPDATE

SKM EGG PRODUCTS -reported its March quarter and full year numbers today.For the three months ended March , Company reported a topline of Rs.66 Cr v/s Rs.69 Cr and a net profit of Rs.7.8 Vr v/s Rs.3.8 Cr ( including other income - standalone basis) . For FY 2014-15 , company's topline is Rs.290 Cr v/s Rs.264 Cr and net profit improved from Rs.7 Cr to Rs.23 Cr .Full year EPS is Rs.8.85 . A tad lower profit in last quarter was mainly due to increased expense for employee benefits and provision for depreciation as per new standards. Company declared a dividend of 10 % after a gap of 5 years. Company is expected to announce their plans to achieve targetted sales within 6-9 months . Though the overall result is not bad , due to mismatch with expectation and reality of investors  , it already corrected more than 10 % . Long term investors can still hold it and  I believe this industry will further consolidate in another few years and it will emerge as one of the very few players in India in this business going forward.

Monday, May 18, 2015

MIC ELECTRONICS - RESULT UPDATE

MIC Electronics posted better result. Full year result includes the income from sale of one subsidiary and also company not provided interest for certain loans . Even after deducting all these , company done well and reported a profit of Rs.5 Cr (approx) v/s a loss. Those with some risk appetite with long term view can consider even at current level.

Saturday, May 16, 2015

GUESS THIS STOCK - 9

 
  
TRY TO IDENTIFY THE STOCK WITH FOLLOWING CHARACTERISTICS
 
1) Company listed in both exchanges 


2) Company reporting loss ever since its listing ( But I believe , it will create massive wealth in the years to come  - :)  )
 

3) Company’s current market capitalisation is less than its last year sales.


4) Retail investors ( Excluding promoters and public share holders holding more than 1%
stake) holding less than 10 % stake in this company .


5) Promoters increased their stake  in last FY compared with previous year.


6) Company is all set to become the sector leader in another few years .


7) Company’s Chief Financial Officer ( CFO ) changed during 2014-15 FY


8) In FY 2013-14 ,  Debt –Equity ratio was more than one.


9) Company’s 52 week high and low prices falls within the same digit range in both exchanges


10) Face value of stock is Rs.10


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 Prima facie , the above credentials may not enthuse you . Yes , it is not a stock with enough numbers to attract market pundits at present  or widely discussed so far . But I strongly believe it will become a multi bagger in future .


 Notes :

Try to find out the company from the above  clues and send the answer to my mail id (valuepick100@gmail.com) with subject line ' GTS-9 ' ,within next Friday . Name of persons sending correct answer on day -1 will be posted on Friday evening and correct answer with detailed report will be published  on Saturday. Please don't ask for more clues or expect any confirmation mails ( Only because of practical  difficulty to reply for thousands of mails) .

Please send the answers only to my mail id and do not post in blog itself as messages. 
Please  DO NOT  post your comments about answer in my facebook page .

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