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April 23, 2009

Is Pantaloon getting into a debt squeeze?

Businessworld has a cover story on the mounting debt levels at listed retail firm Pantaloon.
With Rs 362 crore payable every year to meet long-term debt obligations for the next six years, PRIL’s 3 per cent return on capital employed may not be enough. On capital employed of Rs 5,342 crore, PRIL delivered a turnover of Rs 5,295 crore in 2007-08, representing a cash churn of only 0.98 times of capital employed. Internationally, Wal-Mart generates 2.29 times, but then the firm is a global behemoth. PRIL also has Rs 250 crore worth of inventory on its books and many believe the group’s extended discount sales are testimony to this. But Biyani rubbishes such statements and remains rooted to the Indian retail story.

Investor confidence in PRIL has hit a low too. As against a 63.7 per cent drop in the Sensex from its peak, PRIL’s stock has fallen 80 per cent from a high of Rs 876 on 2 January 2008 to 169 on 6 April 2009. Its market cap has dipped from a peak of Rs 12,913 crore in January 2008 to Rs 2,961 crore on 6 April 2009 (See‘Market Captalisation’). And with 21 million warrants worth Rs 1,050 crore coming up for conversion in three months, Biyani is a burdened man. He refuses to discuss the details of how he would arrange the finances for this but he is believed to have committed shares worth $85 million as a secondary pledge. This is a collateral to a primary pledge, which he would not disclose.

...Going forward, PRIL’s threats are no longer external, they are growing within. The debt service coverage ratio (the ratio of net operating income to debt payments), as of June 2008, was 0.90. This ratio should ideally be over 1. But it threatens to remain at these levels even this year. The ratio brings us back to the basics: the company is not generating enough income to pay its debt obligations. This would mean that Biyani would have to delve into his personal funds every month to keep PRIL afloat. But is he really doing that? He chooses not to answer any questions on financials, but he has recently dabbled with the idea of splitting his retail operations into two firms to unlock value, where the value retail arm will be independent of PRIL.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in