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
-----------------------------------------------------------------------------------
# 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

 
 
 
 
 
 
 
                            
         

73 comments :

  1. VP Sir,

    I had posted the answer on the first day itself.. My name has not appeared!

    Niveditha

    ReplyDelete
    Replies
    1. Pls let me know your mail id or full name

      Delete
    2. even i had posted corrct answer in mail and comments VP-Aditya Modi

      Delete
    3. Without mentioning maid id , it is difficult to verify

      Delete
    4. nivedithar.rao@me.com

      Delete
    5. Not received any mail from the mentioned id

      Delete
  2. Dear sir. But in above description u have mentioned other brands but they just manufacture.
    But in case of Pantaloon they manufacture and also sell through their own stores. In case of page its a very weight business model.but here high rentals due t which very thin margins .
    Ur comments pls

    ReplyDelete
    Replies
    1. Sudheer,

      Leave the story of Pantaloon alone and try to understand the big picture emerging once the merger completes . Madura's brands are available in any standard stores not only owned by company itself . Yes , they also own and operate stores and paying rent . But as against this expense ,selling cost will be less in such formats ( no need to provide retailers commission) .If you want to compare the P/E of a company as you mentioned , you can include the P/E of Shoppers Stop which is close to 85

      Delete
  3. Thanks VPji. I used to read your comments more than the recommendation because your comments give more value picks than the monthly recommendation. Thanks again.

    ReplyDelete
  4. Sir
    Before reading your post I was just comparing it with Monte Carlo fashion which command a PE of 22,although it also has good cash flow.
    Do you think there is some specific reason for Monte Carlo(ifyou track it) cCarlo to be given lower PE multiple than the above branded players.

    ReplyDelete
    Replies
    1. There is no meaning in comparing Monte Carlo with this one due to more than one reasons.

      1) Brand Recall of four brands of Madura is far better than the single brand of Monte Carlo

      2) Predominantly ,Monte Carlo is an woolen knitted apparel player and their business is seasonal.Sales in the four months of winter season equal sales in eight months of summer.An extended summer will adversely affect Monte Carlo's sales but Madura's brands have no seasonality related with weather conditions

      3) Marketing reach of Monte Carlo in no way comparable with that of Madura

      4) Cash Flow of Monte Carlo is erratic and company reported negative cash flow from operationsin FY 2012-13. where Madura generating robust cash flow

      5) I am not expecting higher P/E for Monte Carlo being a company belongs to Oswal Group .

      Delete
    2. Thanks a lot sir for so quick response and bringing in the perspective that I was overlooking.

      Delete
  5. Sir, sales of the pioneer in this year are lower than last year. If sales goes stagnant then it may impact their profit and recovery may be late. Your view please.

    ReplyDelete
    Replies
    1. For any company troubled due to debt issues , it has ceratin limitation to expand business even if there is enough demand due to working capital issues. Situation of pioneer is not different , but they are paying back loans ( Check notes below the result) and cleaning balance sheet. I hope situation will ease going forward. In addition to that , don't think turn around is an incident to be happened over night , it is a process happening over a period of time. If we have no patience to wait and reap benefit , it is better to avoid investing in turn around cases .Let investors with patience make money in cases like Pioneer.

      Delete
  6. Dear V.P Sir,
    Thanks for your recommendation. Don't you think buying AB Nuvo will be a better bet? As investor will get 26 shares of PFRL against every 5 shares of AB Nuvo. Please comment. Thanks and regards.

    ReplyDelete
    Replies
    1. It is one difficult question to answer. If you check the segment wise figures of AB Nuvo , it is clear that the fastest growing business in AB Nuvo is branded apparel . Now that is coming to this company . How market will value AB Nuvo post demerger is a wait and watch.

      Delete
  7. Superb Sir. Nobody can beat you.

    ReplyDelete
  8. No man , no meaning in such a way of thinking .I am only a small and insignificant drop in this big ocean .Just sharing my personal thoughts on some stocks with you , thats all.

    ReplyDelete
  9. Please give your update on Excel industries result. It has reported eps of 37 and with the current market price of 324 isn't it at cheap valuation.

    ReplyDelete
  10. Dear Sir, Your views on Result of United drilling tools. Holding 1000 shares bought @ 40 rs. Thanks to you.

    ReplyDelete
    Replies
    1. Since the business of United drilling tools is a tender based one, difficult to analyse on a quarterly basis . For full year , company reported good performance. But investors may expected same performance in last qtr like previous quarters , hence we can't rule out the chance for a knee jerk reaction

      Delete
  11. In answering one question, you said 30 stocks in any portfolio is big one. But, if one wants to buy and hold the potential stocks indicated by you, generally the port folio will cross 30 stocks. What is the way out? Please reply

    ReplyDelete
  12. Thanks for the great info.
    I tried very hard to get the company from your clues but could not.
    It wlll be great learning for readers like me if the process, data / websites used are elaborated. It may be done by readers too.

    ReplyDelete
  13. Hi VP,

    First of all thanks for providing the excellent opportunity for all of us and the detailed analysis you have put. One thing am struggling to understand here is if AB group is such a massive one with huge profits then why do they need to acquire a loss making company like Pantaloons and merging all their heavy brands with it and take a headache of their whole massive debt. I saw many acquisitions in the past where there is mutual benefit for both acquirer and acquired but this one looks a bit different.

    Can you please throw some light in this regard?

    Thanks
    Sunder

    ReplyDelete
    Replies
    1. Major reason for loss in Pantaloon was debt related and mismanagement during the time of previous management . It has improved a lot after the take over by AB group

      Delete
  14. Sir,

    Your view about competition from e-commerce co. Now a brick & mortar com. are under pressure from Flipcart/ snapdeal/amazon.etc...

    thanx

    Ca Pawan Sharma

    ReplyDelete
    Replies
    1. http://www.madurafnl.com/media/press_releases/madura_garments/madura_homegrown_etailing_initiative.html

      In addition to the above , can you name a single popular e-commerce site in India which is NOT selling the brands Louis Philippe, Van Heusen, Allen Solly and Peter England

      Delete
  15. Sir who decides what ratio will be applicable while alloting the shares . In this case AB Nuvo CMP 1830 and that of PFRL is Rs 190 so 5 shares of AB Nuvo = 9150 and PFRL 26 shares = Rs 4940 so will AB Nuvo shareholders agree to this equation..?

    ReplyDelete
    Replies
    1. When we comment something in a public forum , we must always do it after understanding the subject in full . Anywhere anyone said AB Nuvo is going to merge with PFRL in the mentioned ratio ? . Read the reports you checked once again .

      Delete
    2. This I am asking in view of Mr Ajit Shah comment ...which goes as below
      Ajit ShahMay 23, 2015 at 9:59 AM
      Dear V.P Sir,
      Thanks for your recommendation. Don't you think buying AB Nuvo will be a better bet? As investor will get 26 shares of PFRL against every 5 shares of AB Nuvo. Please comment. Thanks and regards.

      Reply
      Replies

      VALUEPICKMay 23, 2015 at 10:23 AM
      It is one difficult question to answer. If you check the segment wise figures of AB Nuvo , it is clear that the fastest growing business in AB Nuvo is branded apparel . Now that is coming to this company . How market will value AB Nuvo post demerger is a wait and watch.

      Delete
    3. It is clear from the question and answer that shares are allotting to AB Nuvo share holders in lieu of branded apparel business and the remaining business in AB Nuvo will be still with them and that AB Nuvo will remain as listed. In that case how you can say share holders of AB Nuvo will get only 26 shares for 5 shares of AB Nuvo and that is all ?

      Delete
  16. Hi Sir,

    Thanks for this analysis.
    Just out of curiosity, how many companies shares are there in your own portfolio?

    I hope my comment will be posted this time....


    -Thanks,
    Silam

    ReplyDelete
    Replies
    1. Approx 20 .I think you are asking this question seeing my disclosure below each posting . Some times to get the priority of a share holder to attend AGM's and collect details from management , we need to buy few shares .This may or may not keep for long but I can't exclude the same from disclosure as I am holding it at the time of posting the report . This may be 100,500 or 1000 shares. Anyway , as you are aware it is not possible to sell the same within five days post recommendation as per SEBI rules.

      Delete
    2. Dear sir... Up to what extent do you feel is it necessary to attend AGM of any company ? I have never attended any AGM and don't remember anybody from my circle attending one. .. How does it affect our growth in long run ..? Please elaborate .Thanks

      Delete
  17. sir abnuvo could be a better bet as post demeger abnuvo will still have a PAT of 1000 cr and if we take a pe of 20 still it will be a 20000cr company i.e roughly rs 1500 share price plus 5.2*195=appxRs 1000 so in total a share share of rs 2500(without taking into consideration the increase of share price of pfrl from now till the record date)

    ReplyDelete
    Replies
    1. The remaining business in AB Nuvo is Rayon Manufacuring , Fertiliser, Telecom and Financial Service. Personally I am not very interested in first three. Rayon and Fertiliser are like a commodity business and deserving low P/E multiple . In telecom , technological obsolescence is a major issue and companies need to raise funds frequently to stay afloat . Financial service is not a bad one and potential is there . Overall , personally speaking the remaining business is not very attractive to me and hence I prefer PFRL as a pure play fashion company which is showing fastest growth and good potential . So instead of blocking more funds in un attractive businesses , personally I prefer PFRL . This is my personal view and if some one is interested in businesses like Rayon and Fertiliser and able to foresee the price of AB Nuvo once the apparel business demerger , may look into that option.

      Delete
  18. Dear sir,

    Thank u from the bottom of my heart.tried hard to identify gts. Couldn't. Happy to read ur report.

    Thank u so much.

    Jay

    ReplyDelete
  19. Dear VP
    How u see Business Module of Ashapura Intimate Fashion Ltd and is there any comparision with PFRL in long run. Is Ashapura fashion a gud bet

    ReplyDelete
    Replies
    1. Not writing it off , but it is already trading at a P/E of 58.
      I calculated and mentioned the P/E of PFRL (as 28 ) after considering the expanded equity post merger of all cos with itself

      Delete
    2. Thanx VP sir, i understand ur point...

      Delete
  20. Dear Sir,

    Will ABRL (More Stores) be a part of the new venture. Asking this because More Stores has only generated loss.
    And one more question so in this arrangement they will have Retail stores of AB group along with Pantaloons right. Nothing else like the More Retail Stores.

    ReplyDelete
    Replies
    1. Yes , 'More' is loss making but that is not merging with PFRL. Only the apparel retail business of Madura is coming to this company.

      Delete
  21. Sir, you have sound logic in your recommendations with detail analysis. This is for real investment. One concern about Aditya Birla gp is recent cases on coal scam, management integrity and reward share holders. I feel management integrity is key in investing in stock. I believe you consider that. Being Ex L&T ite I know how much it matters in a Organization at employee level for honesty and integrity, L&T is gold standard in India the way they deal with suppliers, customers, employee and shareholders, I think you know that.

    ReplyDelete
    Replies
    1. http://articles.economictimes.indiatimes.com/2015-05-19/news/62368781_1_aditya-birla-group-top-companies-corporate-image-monitor

      Delete
  22. Sir your views on Renaissance jewellery and Sarda energy?

    ReplyDelete
  23. Dear VP

    I have a doubtIf I bought 1000 shares of PFRL then how much shares I will get after Merger.

    ReplyDelete
    Replies
    1. If you bougt 1000 PFRL , you will only get that 1000 . If company 'B' merge into 'A' , only the share holders of company ' B' will get the shares of company 'A' and not vice -versa

      Delete
  24. Dear VPji....whether Madhura garments & Madhura fashions business are in profit as of now with AB Nuvo? When will the top lines of these companies will reflect in PFRL results? In the current quarter or next quarter? Hope you will publish my post.

    ReplyDelete
    Replies
    1. Hahaha. It better be Anonymous! :)

      Delete
  25. Sir, AB Nuvo also has insurance in it right?

    ReplyDelete
    Replies
    1. Yes, thats why I mentioned Fin.serv ,part having potential

      Delete
  26. Sir, what is your opinion on investment in IDFC

    ReplyDelete
    Replies
    1. IDFC is an already suggested stock

      Delete
    2. SIR WHEN YOU SUGGESTED IDFC SIR

      Delete
  27. Hi Sir,
    Most of the brands under this company are catering the same goods to the consumers... Men Formals (mostly). Do you see them expanding it to informal or more into women or children .

    ReplyDelete
    Replies
    1. Already started the same process ,check following links.

      http://www.trendin.com/allensolly/kids/87

      http://www.trendin.com/allensolly/women/4

      Delete
  28. Sir what will be impact of cancellation of FDI by BJP govt in multibrand retail on PFRL.

    ReplyDelete
    Replies
    1. Madura not planned any FDI , how the cancellation of a non existing thing will affect the co ?

      Delete
  29. VP your opinion on TV Today, after the poor show in Q4, the stock has come down to 185 level's, is it advisable to average it or wait for more downside. Thanks

    ReplyDelete
    Replies
    1. Comparatively good in media space .Expecting range bound movement in medium term

      Delete
  30. Dear VP Ji,

    Just wondering why PFRL is dropping down without any bad news..Do you have any news?

    ReplyDelete
    Replies
    1. Majority of people in this martket considering it as place to make quick bucks. Though about 26 proplr identified the stock on day 1 more mails received in the following days ,This indicating lot of people was aware about the stock and they bought it in advance to make quick money by off loading the same . Frankly speaking , this is my inderstanding about the recent price movement, but unfortunately these people not seeing the big picture ..

      Delete
  31. VP Sir,
    What's wrong with Krebs Bio..it has fallen quite during last weeks.

    Thanks,
    Ramesh

    ReplyDelete
  32. To my understanding nothing alarming happened. As you are aware this is one company kept non-operational for more than 10 years .In such a circumstances few months delay in reopening due to non completion of refurbishing of plant and machinery is a possibility which is happening now. As per information provided by company ,I expect commercial production will start soon though it already delayed by 1-2 months from earlier schedule.

    ReplyDelete
  33. Hi VP sir,
    I have been posting my queries for several times now bt it has not been published here once....hope u will publish it this time.....
    Sir what is your view on rain industries & dai ichi karkaria.....

    ReplyDelete
  34. HI Sir, Good Evening,Hope you are good!! Would you still recommend to buy Pantaloon at CMP?

    ReplyDelete
    Replies
    1. Could you explain what you mean by the word 'Still " ? . This stock suggested just few days back and I am not aware of any negative points happened to the company in between. Changing word just by a fall in price in not my practice.

      Delete
  35. Will the online venture abof.com come under PFRL ?

    ReplyDelete
  36. Dear VP Sir
    I am holding on to PFRL with some losses. What are your views on it for the future.

    ReplyDelete

Followers

Tweet TopOfBlogs