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Merill Lynch recommends SELL on Retail Stocks

March 28, 2007

Just a while ago, Merill Lynch has put a SELL recommendation on Retailing Stocks – Pantaloon Retail India Ltd and Shoppers Stop. Both the stocks have a potential downside of 20% from current levels. In the near term, Merill expects cost pressures to rise materially, which should slow EPS growth from 50% plus over the past three years to about 30% over the next two years.

SELL Pantaloon Retail India:
Merill expects Pantaloon’s EPS growth to slow to 36% in FY08 to Rs9.5 and 25% in FY09 to Rs11.9. There is downside risk due to cost pressures and imminent inventory write-off. Excluding the AMC value of Rs38/sh, Merill estimate the pure retail business is trading at P/E of 41x FY08E and 33x FY09E. Merill believes valuations are high given that Pantaloon has a low ROE of about 11%, does not generate cash from operations and is unlikely to do so in the near future.

SELL Shoppers Stop:
Shoppers Stop EPS growth wil also slow to 31% in FY08 to Rs13.7 and 29% in FY09 to Rs17.6. At P/Es of 44x FY08E and 34x FY09E, valuation is steep. Its option to buy a 51% stake in group company HyperCity is a good move, but is unlikely to be a re-rating trigger. It could, in fact, be marginally EPS dilutive in FY09.

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