Truly high priced?

IPO REVIEW

While Piramyd Retail's ambitious plans are well timed, valuations don't justify its current competitive position.

According to AT Kearney's Global Retail Development Index 2005, India ranks as the most attractive retail destination in the world. The share of organised retail in the country is expected to go up from the current three per cent to about 8-10 per cent by 2010.

The reason? A change in India's demographics with an increasing proportion of young and working population. Higher disposable income, growing affluence levels and changing lifestyles is likely to drive growth in retailing.

Piramyd Retail Ltd. (PRL), part of the Rs 3000 crore Piramal Group, is gearing itself up to take advantage of this opportunity. The company's IPO is another chance for investors to jump onto the retail bandwagon.

However, in an industry which already commands high valuations with investors willing to pay a premium for super fast growth, new comer Piramyd does not seem to offer any introductory discount. Instead, its stock is priced at a premium to its listed peers like Pantaloon, Shoppers Stop and Trent.

PRL plans to raise Rs 108-126 crore through a public issue of 90 lakh equity shares of face value of Rs 10 each. The price band is fixed at Rs 120-Rs 140 per share. PRL plans to use the issue proceeds to fund capex requirements for expanding its retail network, upgrading IT infrastructure and repaying bridge loans.

Business
PRL was incorporated in March 2005 by merging group companies, Piramyd Retail and Merchandising and Crossroads Shoppertainment. The company plans to increase its 5 Piramyd Megastore and 8 TruMart supermarkets with 2.7 lakh sq ft of retail space to 17 and 69 respectively.

By FY08, the company expects to have 8.56 lakh sq ft of retail area. Currently, the company derives 45 per cent of its revenues from 80,000 members of its customer loyalty program Piramyd Power Club.

Analysts say that the company could enjoy better margins from its lifestyle business under the Piramyd Megastore brand which houses apparels, accessories, jewellery, watches, footwear, interior decor etc. Currently, this contributes about 75 per cent to the total revenue.

But going forward, the company intends to focus more on the FHPC (food, home and personal care products) business. This segment, catering to daily shopping requirements under the TruMart brand, contributes 20 per cent to total revenue, as of now.

This strategy, if executed well, could reap rich dividends as food retailing is one of the fastest growing segments within the organised retail sector.

Having said that, the company faces certain business risks. Though Piramyd Retail was among the earliest entrants into the retail space, since then others have caught up and overtaken them.

With the competition levels set to increase, it remains to be seen how well Piramyd Retail is able to scale up. Especially so, when the company has plans to expand its retail space by the three fold in the next three years.

Another worry is the presence of other big malls which offer all sorts of products under one roof. Since Piramyd's offerings are limited to only a few products, it is likely to lose out on the 'footfall factor' in the long run.

Even more, as more players get into the retail business and companies lure customers by offering discounts, profit margins are likely to be under pressure. Also Piramyd relies on a single distribution centre for its sourcing requirements which is risky.

Financials
After incurring mounting losses for the past three years, the company has successfully turned around and posted a net profit of Rs 40,000 in Q1FY06 on a revenue of Rs 14.13 crore. For Q2FY06 the company reported a total revenue of Rs 23.65 crore and net profit of Rs 0.5 crore. 

FINANCIALS
(In Rs crore)	Q1FY06	FY05	FY04	FY03
Net sales	14.13	53.60	37.83	32.65
Other income	1.27	5.32	4.87	5.64
Operating profit	-12.30	-13.17	-11.47	-12.21
Net profit	0.04	-10.53	-9.76	-10.65
P/E at Rs 120	132
P/E at Rs 140	154

Overall, the issue looks risky taking into consideration PRL's less-competitive position compared to its peers and stage of operations. The stock may witness FII interest, as foreign investors are not allowed to enter retail sector through the FDI route.

Valuations
Based on annualised earnings for the first half of fiscal 2006, the stock commands a price-earnings ratio of 132x even at the lower end of the price band. As opposed to this, established peers like Pantaloon, Shoppers Stop and Trent are trading at a trailing 12 month P/E of 82x, 79x and 45x respectively.

Given the tremendous appetite for retail stocks on the bourses, chances are that the issue will be in demand, and there could be listing gains. But analysts feel that there isn't enough margin of safety at the current price.

Issue closes on: November 16, 2005