This is what Marc Faber told me when I asked him about Pantaloon Retail. He added further that although he did not have any personal stake in that company it might be possible that one of the companies in which he was a director may have taken a position. Marc is the guru of modern day investing if you might call it and his opinion on markets, currencies and economies are meticulously heard, analyzed and implemented all over the globe. In 1987 he warned his clients to cash out before Black Monday on Wall Street. He piquantly forecasted the burst in the Japanese Bubble in 1990.This was before the Nikkei from 40,000 odd lost 75% in value plummeting to 10,000 in about a decade and a half. He correctly predicted the collapse in US gaming stocks in 1993; foresaw the Asia-Pacific financial crisis of 1997/98 and the resulting global volatility. Currently Marc is bullish on Gold, Silver, Metals, Coffee , Orange juice and Sugar . His greatest bet last year was on crude. When crude was in an over supply zone hovering around US $ 12 he ventured out to be a bull. Now well over US $50 per barrel Marc feels crude is still far away from the top.

Before you rush to call your broker just listen to what Marc had to add further on Pantaloon - "Once a stock becomes recognized the risks are higher." My attempt in understanding (whatever little) these great investment minds whether it is Faber or Peter Lynch is the magnetic power of the smart money (managers) to avoid what is in demand (fancy). Pantaloon as a stock has an FII holding of around 26%. The BSE website further reveals that Rakesh Jhunjunwala the leader of this bull market holds more then 400,000 shares. A high FII holding means that the stock is already under the research microscope and in the words of a fairly good acquaintance of mine "you could get creamed if these guys start to sell."

For the past two years I have attempted to follow the Indian organized Retail Industry. Read my earlier reports "Is there a Wal Mart on Dalal Street" and "If you buy good from the Pantaloon stores you might as well buy the stock". Since there are just a few companies available (Pantaloon, Trent and Titan ) the investment basket from the stock market's perspective is limited. The share of organized retail in the total retail pie is likely to grow from 2% now to 5-6% by 2007." In their latest India Retail Review, real estate consultants Knight Frank presage a share of 20% by 2010.

Pantaloon has been a forerunner in this race. It has embarked on a scorching pace and expects to increase its turnover from the current Rs 650 crores to over Rs 1,000 crores by the end of next year (June 2005). Pantaloon head-supply chain & logistics Anshuman Singh said that the company aims to facilitate this through standardized processes enabled by the ISO 9001-2000 certification that it recently received for its entire supply chain.

CAGR - Compounded annual growth rate

RONW - Return on Net worth

ROCE - Return on Capital Employed

ROCE computations have been done excluding brand valuation

The ROCE at over 20% inspires confidence-If I have played enough of the devil's advocate to restrain you from investing into this stock then you should also look at another aspect of financial engineering and that is if you can generate a ROCE at a rate faster then the cost of Capital then you would do just fine. After all Return on Capital employed is the amount of money that we can make for a rupee of investment. Pantaloon with an ROCE of 20% appears comfortably placed with a 9% cost of capital I have come across research reports that assume the cost of capital at 12% but then 9% is what the company pays really. The ROCE and RONW (Warren Buffet placed greater reliance on this ratio while picking up stocks) have shown tremendous growth over the last couple of years.

While Pantaloon's inventory sales ratio has improved from 4 times in Fy03 to 5 times for FY 04. It is still below the 6.5 times figure for Trent . While a higher stock turn is always an advantage Pantaloon is presently in an expansionary growth phase. With stores opening up throughout the year their contribution to the sales could just be for a few months depending upon their time of opening. On the other hand closing stock is a constant that has to be maintained irrespective of whether the stores sell for 4 to 6 months or for the full year. Therefore the Inventory sales ratio for the next couple of years would show lower figures since sales represent only a fraction of the current year's capacity. A better tool of valuation is to take a weighted closing stock depending upon on number of months the store has been in operation.

Pantaloon is pioneering the radio frequency identification device (RFID) system in India. This would reduce the time to market from several months to 21 days and will be implemented in 2005.

While the company has set internal benchmarks to generate a PBIDT of 11% on sales for the present the EBIDTA is at around 8.6%. The multiple format stores have differentiating financials. While the margins are lower for the Value Retailing business (Food Bazaar and Big Bazaar) it is substantially higher for the Life Style pattern of Retailing (Pantaloons and Central). Food Bazaars (groceries) normally have higher stock turns and the only way to increase profits is by increasing sales. The management believes that it can set up as many food bazaars as it thinks of but to keep the margins higher they have taken a pragmatic step of not letting the food business revenues exceed 30% of its total turnover. In the last quarter the company opened up a larger number of Big Bazaars and Food Bazaars hence margins were negatively impacted.

In the next couple of months Pantaloons would be setting up more then 400,000 sq feet of the high margin Life Style (Central) format stores. That should help keep margins on track for the current year as the new store openings for the remainder part of the year would be skewed more in favour of the high margin Life Style Retailing format stores. However on a broader perspective the company estimates Value and Life Style Retailing as a contribution to gross revenues to be in the ratio of 55:45.

Interest Costs on incremental debt are a drag on profitability higher interest cost on incremental debt has also impacted margins. B eing in an expansionary phase the roll out of new stores makes pantaloon a cash guzzler for the initial years. However they do cash pay back of 10% and their incremental capital to sales ratio is 1:10. This means that a rupee of additional investment generates Rs 10 in revenues. With cash pay back of 10% they realize their investment within one year of operation. One notable point of analysis is that all stores within their individual level are making money so there is no dead wood to cut. How ever since they need huge amounts of capital to keep pace with the growth my fear is that till the time they decide to slow down on new openings profits would be impacted by debt overloads . After all, the company is expected to expand its retail space from the current levels of 1.1 million sq feet from to 3.00 million sq feet by the end of next year and 5 million sq feet by 2006.

The Company is also launching private labels for the two new business categories it is venturing into beverages and homes. Biyani opines that like Coke , he is also contemplating the launch of a new brand for the beverages business. The beverages category would fall under the umbrella of Food Bazaar The introduction of private labels will boost margins. The company is also entering into contract farming for a number of vegetable and diary products.

December 2004 will see 20 Pantaloon outlets undergoing a complete makeover. Kishore Biyani confirms that while they are looking at a mall-new identity for Pantaloon, it makes sense to change the name as well. However, they have not zeroed in on any brand name as yet. The plan is to attain a complete new personality which would comprise new merchandise and new format stores, among other things". Biyani wants everything to change. All Pantaloon stores will be redesigned from scratch. The revamped stores will be more contemporary in nature and is expected to talk the language of the youth. While Biyani declined to divulge the total investment being made for the entire revamping exercise an amount of Rs 150 crores would be invested in expanding retail space from the current 1.1 million square feet to 3 million square feet by 2005.

Can Biyani pull it off again? In 2001 with gross revenues at Rs 176 crores a negative cash flow, a multiple store format that had never been tested before in any part of the world, rising debts and a stock that could not have been used as a currency since it traded at Rs 50 odd Pantaloon ventured out to suggest that they would be doing Rs 1000 crores in sales for FY 05. The targets were dismissed as wishful thinking with many analysts refusing to cover Pantaloon as an opportunity. Biyani has silenced all critics. Presently the company appears all set to achieve a six-time growth in sales over a period of 4 years. While the management has refused to commit itself for the sales figure for the year 2007 market grapevine and informal communications have revealed that sales for that year should be around Rs 5000 crores. Another angle of projecting the same detail is to take the square foot as a tool of estimation.

Currently with around 1.1 million sq feet the company is capable of doing around Rs 900 crores. In the present phase of expansion the total area is expected to go up to 5 million by 2006 ( media reports based on management inputs). They have already taken an area that would take their total sq feet to 3 million by 2005 end. So if the leased out area is to grow by 5 times then sales with a one-year lag should also do the same also the increase in same store sales should help. In case Biyani can keep up with the run rate the shareholder will have nothing to complaint about and plenty to shop from the company that has embarked upon spearheading the advent of organized Retailing into India.

The stock at Rs 450 currently discounts its FY 05 EPS by around 23 times. Assuming the Net profit margins to be maintained at of 3% (Company hopes to better that) they should do a profit after tax of Rs 150 crores translating into an earning per share of about Rs 75 for FY 07. For a company located in the cusp of a structural change a discounting factor of around 25 times looks probable. While a one-percentage point increase in margins could make you upbeat you never know where a one-percentage point contraction in margin could take you. Wal Mart with its most efficient processes has a net profit margin of just 5.5% and with that perspective these 3 and 4 percentage debates do not look ugly

Sources: Print Media and Company communications.

Basant Maheshwari is a Cost Accountant and a Post Graduate Diploma in Equity Research and Analysis from ICFAI (Hyderabad) and has long positions in this stock and recommends long term investors to buy at present levels and use declines as an opportunity to increase holdings. Although the stock appears attractive and forms a part of his core portfolio, the basis of assumptions on which this report is prepared may or may not happen As always readers are expected to consult their financial advisors and exercise their own judgment in deciding whether to buy or sell this stock Comments are invited from readers and analysts at & .