Biyani to seek strategic union in retail post non-core sale

Rakesh Biyani, joint managing director of Pantaloon says the company is planning some more transactions on non-core assets to further bring down debt.

Last month, the Future Group sold a majority stake in Pantaloon's department chain to AV Birla Group's Aditya Birla Nuvo for Rs 1,600 crore that included Rs 800 crore of debt transfer.

Biyani plans to sell more non-core assets in a bid to make Pantaloon Retail debt-free by March 2013.

The consolidated debt stands at Rs 6,000 crore at the moment, Biyani told CNBC-TV18 in an interview.

The Future Group, which has been in an aggressive expansion mode, ran into a crisis with consolidated debt of Rs 7,800 crore that weighed on its profitability. Pantaloon Retail has been spending more than Rs 100 crore in interest over each of the past three quarters. This started to pinch as consumer spending slowed. That was when Biyani started looking to sell assets to pare debt.

Also Read: All you want to know about Future Group stake sale

Biyani says the company is in talks to hive off stake in its insurance business. He also said the company has a put option for stake in Staples Future Office Products, which is likely to conclude in the next couple of months.

The Staples sale stake is expected to fetch Rs 150 crore. PRIL holds 39.5% stake in Staples Future Office Products, a joint venture between the company and Staples Asia Investment (a unit of Staples, US).

In Future Supply Chain (FSC), a supply management firm, the group may hive off part of its 70% stake. The rest is held by Li & Fung. FSC has a debt of Rs 125 crore.

"We will make an announcement on Future Supply Chain by July-end," he adds.

Below is an edited transcript of Biyani's exculsive interview on CNBC-TV18. Also watch the attached videos.

Q: Where does your debt stand at after the Future Capital deal and whether for the rest of this calendar year, you have any more strategic sales lined up or that you hope to tie up?

A: I think the debt number will happen only by the end of September or maybe end of December because most of these transactions concluded are in the process of getting executed. Between the two transactions that we have done is a substantial amount of debt, close to Rs 2,300 crore is likely to get addressed with these transactions. Some more transactions are on the anvil early to say, which one will get concluded. But we are trying to focus first on our non-retail assets and then we will look at if there are any opportunities on the retail side for a strategic alliance or a partnership somewhere. But it is too early to say if there is something going to happen there.

Q: Would it be a reasonable estimate at this point though to say that in the next nine months till the end of this fiscal year if things go as your planning, you could pare down your debt to about Rs 4,000 crore or is that too aggressive an estimate?

A: If you go by the consolidated debt position then the debt addressal will be close to 6,000 crore because Future Capital is a large chunk of that debt. In all probability, that debt would be lower than the number indicated. My feeling is that our internal targets would be to see if we can end between 2,000 and 2,600 kind of levels.

Q: The market is expecting some newsflow in the next few weeks if not in the next month or two on Staples Future of its products, how close are you to sealing a deal on that?

A: As part of our agreement with Staples, we do have put option for our stake holding. The date to exercise that is early next month. We already have a lot of discussions with them and the process is currently on. We are hopeful of the fact that within next couple of months, we should be able to conclude that transaction.

Q: The one that has generated the most interest is your insurance venture and some domestic names such as the Anil Ambani Group as well have been spoken off, can you confirm whether you are looking to do a sell and whether it would be a domestic entity that you are leaning towards right now or some kind of global sell?

A: I think under the regulation it needs to be a domestic entity, it cannot be a global sell because we already have an international partner there. So I think it is early to say with the people that we are negotiating with or who is happening. I think it is more to do with also the comfort that our partner also has with. It is a process, it is part of our non-retail assets and definitely that is one of the options available to us to see if we can find a partner to buy that asset also.

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Q: You have already run the exercise or valuing this particular venture though, how have you valued it and have you already received any responses?

A: I think I would say it is early for me to comment on it right now. It is an ongoing process and I don’t want to share anything beyond what is currently happening. If we are able to conclude, we will definitely come back and share with the board and take their approval. But also you need to understand the fact that this is also regulatory in nature. All these transactions are subject to regulatory requirements.

Q: Would you cut your stake down from 70% to 51% very soon, is your partner Li & Fung interested in buying the remaining stake from you, where are things headed on that?

A: We have had a very good partnership with Li & Fung. Li & Fung has expressed the desire to move up on their stake in the venture and that is currently in discussions. We would be happy to come down to about 51% kind of level in that particular venture. So again, that is the process currently on, if there is something which will happen on that again it should likely to happen in July or August on that front.

Q: What about eZone and Home Town. Can you give us an update on where things stand with that process?

A: On Home Town, we have decided to demerge the business. Thereafter, we will look at consolidating that business and then see if we can bring in a strategic partnership there or bring in other investors on that particular concept since it is still a maturing concept. So with that one concept, we would try and consolidate the corporate structure to make it little simpler to operate the business and we have already done that as far as the organization goes.

Now, we need to get the corporate structure to become the same so we can bring in the efficiencies on the cost front as well as simplifying the way the business operates. Over the last couple of months or so, once these changes have kicked in even though the sales have continued to be subdued – more to do with the market condition but the traction has become better and month on month rate of sales for us is looking positive and the margin is looking even higher.

Q: While a lot of these exercises will help pare down your debt, there is concern on what is happening with the core business itself in terms of same store sales growth slipping across categories - the fact that you have chosen to go a little bit easier on retail expansion. On core business what can you hold out in terms of growth expectations?

A: I think there is a misconception on the fact that we have slowed down our expansion. We have added close to 2 million square feet of retail space. The only difference is the fact that as a percentage of our base, the percentage has started shrinking but that is obvious because the base itself is much larger. The numbers have slowed down, partially it’s due to lot of internal restructuring plus a specific call on at least four categories where we thought that we need to revamp the entire category from ground. So we made it into a zero base, we rebuild the entire team structure and relooked our assortment strategy there and slowly. But surely, these four categories are getting into place. We are confident of the fact that come July-August, when all these four categories would be back in place in the store with the full offering the same store sales should look more positive. Partially, it has also been affected because of the market condition, the consumer demand itself continuous to be very subdued.

Q: Have you set out a target in terms of what you want to hit on sales and on EBITDA performance itself?

A: I think for us we are looking at same store sales growth, which has to be much more than what we have delivered in the last year. Internally, we are all running for a close to 14-16% kind of same store target that is the number that we are trying to target. A lot of it is also going to depend upon how the markets are going to behave over the next couple of months.

By August, we will come to know the trend but on the category that we have revamped clearly the potential to continue to deliver double-digit growth is higher because we had a slippage on some of these categories last year. We will rebuild the business on those and not only will we deliver a much higher same store growth, recovering the losses of last year in terms of sales but also deliver a much higher margin.

As far as the margin front goes, the net operating margin will look at increasing significantly but if the same store sales also get delivered, the impact on the bottomline will be much higher, significantly higher in fact.

Q: While these asset sales that you are planning will improve your balance sheet, what will it take away from core earnings and turnover because you are making some sacrifices on contributions to your top and bottomline? Net-net, will it still be accretive or will you be working with a much lower operating cash line going forward?

A: When you look in to Pantaloon's transaction, the topline that is going away is about Rs 1,600 crore which on consolidated retail number, its about 13.5-14% of our sales. It takes away about Rs 1,600 crore of debt. So in that in terms of bottomline, I do not think it is an issue - even on the topline, it’s a 13% which goes away. But we are going to able to deliver same store growth of close to 14-15% and plus the expansion. We would be able to achieve the numbers back and so you won’t see a dip in the sales as such.