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Sunday, November 13, 2005

Piramyd Retail - IPO


No profit, but high price

This small player wants to finance its big expansion plans in the booming retail industry by an IPO at a stiff price

Piramyd Retail, part of the Piramal group, is one of India's pioneers in organised retailing. Incorporated on March 18 2005 by taking over the business of Piramyd Retail and Merchandising and Crossroads Shoppertainment, the company is in two segments: Lifestyle retailing and Food, Home and Personal Care (FHPC) retailing.

The offerings of the lifestyle retailing arm, Piramyd Megastore, include apparel and accessories like jewellery, watches, footwear and home textiles, and are targeted at the informed and fashion conscious customer. The FHPC business, TruMart, caters to bulk buying and top-up requirements of retail customers.

By 2008, Piramyd Retail plans to increase its presence in five cities through five megastores to 17 and eight TrueMart stores to 69. A capex of Rs 118.79 crore will go to add eight megastores occupying around 5,02,000 square feet by FY 2007 as well as 13 TruMart supermarkets by FY 2006 and another 24 by FY2007. The TruMart supermarkets would occupy around 1,78,000 square feet. Upgradation of IT will cost the company Rs 6 crore. The company will repay a bridge loan of Rs 30 crore and meet issue expenses of Rs 7.24 crore. The total requirement of funds is around Rs 214.91 crore, of which Rs 162 crore will be met through this issue.

Strengths

  • Of the 90 lakh shares on offer, promoters will subscribe 40 lakh shares (nearly 45% of the issue) at the issue price, depicting their confidence in the company.
  • Retail is a very fast growing industry.

Weaknesses

  • Additional capital resources to meet expansion plans will involve equity financing, further diluting shareholding.
  • Private labels, a high margin business, contribute just 7% of the revenue as against 20% for Shoppers’ Stop.
  • Reliance on a single distribution center in the western region means that any unforeseen region-specific event will bring business operations to a standstill.
  • The relatively small player’s sales were just Rs 53.6 crore in FY 2005 against Rs 419 crore of Shoppers’ Stop and over Rs 1084 crore of Pantaloon Retail.
  • Lifestyle category is highly sensitive to overall economic conditions.
  • The rise in interest rates will increase real estate rentals, which is detrimental to the company’s growth plans as its business model will have to be focused on urban areas.
  • Competition, particularly in lifestyle category, will increase when the government permits FDI in retail.
  • Oversupply can arise much faster than expected due to the pace at which malls are being set up across cities.

Valuation

Piramyd Retail has been making losses since the past few years. It is relatively a very small player in the organised retail market. Also, the growth in turnover is very modest compared to listed peers. Though there is market fancy for organised retail players, the company is yet to deliver results. Yet, it has come out with an issue at a hefty premium (price band: Rs 120 to Rs 140). Recently, it privately placed equity at Rs 180. The only consolation is that promoters will be subscribing to 45% of the current IPO at the issue price.