Pantaloon Retail is planning to spin off some of its business verticals such as Big Bazaar and Food Bazaar into separate companies. In a notice to the Bombay Stock Exchange, the country's biggest retail chain, promoted by Kishore Biyani, said the company will realign its business lines and is considering "separate legal entities."
Though Biyani declined to share details, saying the board will meet to take a final decision, analysts said the move is aimed at unlocking value in these companies through stake sale.
Apart from Big Bazaar and Food Bazaar, which contributed over 55 per cent of Pantaloon's Retail's revenue of Rs 4,776 crore (Rs 47.76 billion) in 2007-08, the retail chain could also hive off at least four more verticals like Brand Factory etc, analysts said. Big Bazaar is the group's hypermarket business and has 109 stores and Food Bazaar is a supermarket chain with 152 stores.
Pantaloon may also form joint ventures with international retailers in a few of these legal entities, the analysts said.
The notice to BSE also talked about renaming Pantaloon Retail because of the restructuring process. Pantaloon Retail could become a holding company which will own stakes in the legal entities, sources familiar with the developments said.
The company also said it would raise money through sale of shares or convertible warrants to fund its plans. The sources said Biyani was looking at raising around Rs 600 crore (Rs 6 billion) through this route within the next 40 days.
The sources said Biyani was expected to increase his stake in the company through buying shares or warrants and might not tap investors now, given the poor market conditions. Out of the total 46.50 per cent promoters' stake, Biyani holds 5.15 per cent equity in the company.
According to analysts tracking the company, the proposed fund-raising is expected to bring down the debt-equity ratio of company, which has been going up steadily, reflecting the increased borrowing of the company to fund its plans. The ratio has gone up from 1.17:1 in FY 2007 to 1.21:1 in FY 2008 and is expected to be around 1.40:1 in the current financial year, which ends on June 30 (the company follows the June reporting cycle).
As on June 30, 2008, the company's debt went up 69 per cent per cent to Rs 2,767 crore (Rs 27.67 billion) compared to the same period in the previous year. The company's market capitalisation has slumped 78 per cent to Rs 2,995.04 crore (Rs 29.95 billion) from its all-time peak on January 2 last year.
While sales went up by 31 per cent in the first six months of this financial year compared to the same period in the previous year, net profit was up 13.7 per cent in the same period.
"The company is dependent on external capital now as it is generating negative cash flows for some time. If equity comes in, the debt-equity ratio will improve and company's expansion plans will be on track," said an analyst with an international brokerage who did not wish to be identified.
Biyani has already slowed his expansion plans with an attempt to conserve cash and help his group's flagship company, Pantaloon Retail, earn positive cash flows from its operations. Cash flows from operating activity were a negative Rs 19.2 crore (Rs 192 million) in FY 08, compared with a negative Rs 271.9 crore (Rs 2.719 billion) a year earlier.
Analysts said the company has almost halved its expansion plans for FY09 and FY10 at 2.5 million square feet a year from the earlier projection of 4 million sq feet a year.