Pantaloon Retail (India)’s board of directors approved a proposal to raise equity funds of up to Rs 1,500 crore. The board has told the company to restrict equity dilution to a maximum of 15%, and to limit its debt to equity ratio to 1.33 times. Pantaloon has postponed its annual general meeting from 22 October to 10 November, giving it time to seek permission for the equity issue from its shareholders in the AGM itself.
The fund raising plan comes at a time when the company’s stock has been hammered, falling by 44% since end- August. The company had announced its June quarter (Q4) results on August 25. Its sales growth in its key segments –value (formats such as Big Bazaar), lifestyle (Pantaloon) and home (Home Town)- were lower in the June quarter, compared to the rest of the year.
Moreover, the company publishes its consolidated results only at the end of the fiscal, keeping investors in suspense till then. This year, its consolidated results reveal its debt rose by a whopping 80% to Rs 7,846 crore, and its debt to equity rose to 2.5 times, compared to 1.5 times in the previous year. All of this may have contributed to the fall, since its results were announced.
Apart from its value retailing business, which is now housed in a subsidiary, the company has several subsidiaries in related businesses and even in financial services. The company’s current proposal may be to appease investors who have been deserting the stock.
A few things are not clear in the current proposal. The proposal says that equity dilution must not exceed 15%. Using its current market price and the equity capital of 20.11 crore shares as of 30 June, the amount it can raise works out to about Rs 570 crore, and even on a fully diluted equity capital, it works out to about Rs 590 crore. How it proposes to raise Rs 1,500 crore is not clear.
The company has said it will carry out the plan in phases, indicating this is an enabling approval. Perhaps, Pantaloon will take steps to first improve its valuation. As a first step, it may bring on board one or two large investors, whose presence may assuage investor concerns. Two, it could divest a significant stake in some of its non-core subsidiaries, and raise money from it. The company is also reportedly looking to divest its stake in its financial services company, Future Capital Holdings.
The money it raises from such issuances will not only help raise money to repay debt, but also calm investor nerves.
It is not an easy task that lies ahead of it. As of 30 June, if it has to bring its debt-equity ratio down to 1.33:1, the company will have repay about Rs 3,130 crore worth of loans. That’s a tough job for the company in a difficult operating environment: both for its business and the capital markets. Worries over Europe’s ongoing fiscal crisis and America’s slowing economy have affected Indian equity markets.
Pantaloon will get a fresh lease of life if the government actually sets the ball rolling on FDI in multi-brand retail. Even if takes ages for the bill to clear parliament, if the bill gets cabinet approval, it may restore some investor confidence in Pantaloon. The company has a vantage position in the Indian market, and investors would rightly assume that it will be one of the prime targets for foreign companies or investors looking for a stake in India’s retail industry.
But that is all in the unforeseeable future. On Monday, the stock was down by 4.3%, while the market was down by 1.8%. Investors are having their glues eyed very much on the near term. An impending equity issue means that the earnings per share will get diluted further.