The Hindu Business Line : Piramyd Retail: Avoid

Piramyd Retail offers shoppers a distinct retail model, which could succeed in attracting footfalls. But it might be a bit early for the company to attract premium valuations.

PIRAMYD Retail (PRL), part of the Ajay Piramal Group, is set to become the fourth retailer to enter the listed space. But investors can give this public offer a miss, as we believe that the asking price is stiff. The ambitious expansion plans, if executed on time, offer scope for a substantial ramp-up in earnings over the next two years. But even at an optimistic earnings growth estimate, the offer price at the upper end of the band values the stock at about 35 times the expected FY-07 earnings.

This premium valuation is enjoyed by Pantaloon and Shoppers' Stop, which operate on a larger scale and with proven formats. Pantaloon has near-perfected the discount-store format, while Shoppers' Stop is seen as a pioneer of the departmental store format in India.

Piramyd offers shoppers a distinct retail model, which may succeed in attracting footfalls. But it may be a bit early for the company to seek to attract such rich valuations. We will re-visit the company when there is greater clarity on the business model.

Our recommendation is not linked to any gains on listing. The current foreign direct investment (FDI) norms do not foreign institutional investor (FII) participation in the IPO of a retail company. FIIs can choose to participate in the offer, post-listing, which could lead to a spurt in the share price. With three other listed retailers competing for investor attention, however, we do not expect the Piramyd stock to enjoy the kind of scarcity premium that previous offers have.

A chunk of the customer's wallet

PRL hopes to lighten customers' wallets through its retail chains — Piramyd Megastore and TruMart. Piramyd Megastores are departmental stores that offer a wide range of brands in apparel, watches, accessories, cosmetics and other `lifestyle' segments. TruMart, in the supermarket format, retails food, groceries, household items and personal-care products. There are now five Piramyd Megastores and eight TruMarts spread across two lakh square feet. With the proceeds of the offer, PRL plans to quadruple its retail space and would have 17 Megastores and 69 TruMarts by FY-07.

PRL has focussed on expansion plans and would scale up region-by-region, focussing first on the West and North — markets that are relatively less saturated when it comes to organised retail. It has also forayed into Tier-II cities such as Pune, Nagpur, Ludhiana and Ahmedabad right from the initial stages of its expansion. The retailer would be able to tap the growing purchasing power in these cities, where customers ostensibly do not have access to the wide range of brands that Piramyd Megastores offer. In the case of its supermarket chain, TruMart, PRL plans to operate on a hub-and-spoke model.

About two-thirds of the 69 outlets planned would be small stores of 1,500-2,000 square feet aimed at meeting customer's top-up or daily needs. Called TruMart Daily, they would be positioned as neighbourhood stores in direct competition with the kirana or street corner shops. The TruMart Supermarket would be larger stores catering to customers' bulk needs.

The company hopes to attract more footfalls at Piramyd Megastores by opening a couple of the TruMart Supermarkets within the departmental store. The company has also tied up with Jammin', run by a group company, to provide family entertainment and with bakeries and 24-hour pharmacies to draw footfalls to its supermarkets.

Earnings outlook

PRL just managed to break-even in the April-June quarter. Given its aggressive expansion plans, the revenues at Rs 53 crore, as of FY-05, are likely to get a significant boost. There are, however, execution risks.

While the company has tied up properties at several locations, any delay in store openings could have a telling effect on revenues. These risks are also borne by other retailers such as Pantaloon and Shoppers' Stop also face, but are likely to witness robust growth even with their existing operations, given their larger scale and market share.

Sustaining the rapid pace in expansion might involve acquiring properties; PRL has purchased stores outright in the past. If it pursues this strategy, profits would lag revenue growth, as interest and depreciation costs mount.

PRL's margins are unlikely to be higher than those of its peers. For one, the share of private or in-store labels is only 7 per cent. Private labels earn more margins, as the retailer saves on advertising costs associated with branded products.

PRL is looking at increasing the share of private labels; it plans to leverage its relationship with its group company, Morarjee Textiles, to source garments for its stores. But it would be a while before its own-store labels gain credibility and contribute significantly to revenues.

Second, a growing contribution from its food and groceries business would mean lower margins. Revenues from TruMart account for less than 25 per cent of the business, but the management appears serious about this segment. While the format is slated to be one of the fastest growing, competitive pressures would force prices down. PRL is not targeting price-conscious customers, but given the number of discount store formats springing up, they may not be able to command a significant premium to peers.

Offer details: Ninety lakh shares are on offer, of which only 50 lakh are available to the public. The balance would be subscribed by the promoters. The price band is Rs 120-140. The post-offer equity would be Rs 20 crore and the promoters' holding nearly 65 per cent. The offer closes on November 16. The lead managers are Enam, DSP Merrill Lynch and Edelweiss Capital.

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