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Pantaloon: Better than what’s visible - Views on News from Equitymaster
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Pantaloon: Better than what’s visible
Jan 23, 2008

Performance summary
  • The new store momentum drives the topline growth, which grew 63% YoY. During the quarter the company opened 23 new stores increasing its retail space from 6 m sq ft to 6.7 m sq ft.

  • Operating profits reported whopping 92% YoY growth during 2QFY08 as costs grew at a slower pace compared to net sales growth.

  • Net profits decline 28% YoY.

  • Interest and depreciation charges more than doubled during 2QFY08 as compared to 2QFY07.

  • If one excludes other income effect, net margins have expanded by 1.7% in 2QFY08.

  • The board has approved setting up wholly-owned subsidiary companies for Big Bazaar, Food Bazaar, speciality retail business activities and property & mall management on a going concern basis, subject to receipt of all requisite statutory and other necessary approvals.

Financial performance snapshot
Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 7,527 12,268 63.0% 13,561 23,132 70.6%
Expenditure 6,958 11,171 60.5% 12,585 21,080 67.5%
Operating profit (EBDITA) 568 1096 92.8% 976 2052 110.3%
EBDITA margin (%) 7.6% 8.9%   7.2% 8.9%  
Other income 378 13 -96.5% 733 21 -97.2%
Interest 206 418 103.3% 322 769 138.8%
Depreciation 82 204 148.0% 149 357 139.1%
Profit before tax 658 487 -25.9% 1,238 947 -23.5%
Extraordinary Item - -   - -  
Tax 219 171 -21.8% 411 333 -19.0%
Profit after tax/(loss) 440 317 -28.0% 826 613 -25.8%
Net profit margin (%) 5.8% 2.6%   6.1% 2.7%  
No. of shares (m)       141 151  
Diluted earnings per share (Rs)*         7.3  
Price to earnings ratio (x)         89.3  
(* trailing 12-months)

What has driven performance in 2QFY08?
  • During the quarter, the company opened 23 stores expanding its retail space from 6 m sq ft to 6.7 m sq ft. The value and lifestyle segment reported 68% and 64% growth on a year on year basis in 2QFY08. Increased penetration with increase in retail space coupled with the company’s initiatives of venturing into new segments and exploring opportunities in the value segment continue to aid topline growth that grew by 63% YoY in 2QFY08.

  • In 2QFY08, costs grew at a slower pace compared to topline resulting into whopping 92% YoY growth in operating profits during 2QFY08. Typically, when the retailer expands retail space by rolling out new stores, its employee cost and other expenses scale up. However, the company was able to contain costs as a percentage of sales basis, which has resulted in 1.3% expansion in EBITDA margins.

    Cost break-up
    (% of sales) 1QFY07 1QFY08 1QFY07 1QFY08
    Increase/decrease in stock in trade -13.0% -12.8% -10.1% -12.9%
    Raw materials consumed 1.5% 1.3% 1.6% 1.3%
    Purchase of traded goods 79.3% 81.2% 75.5% 80.7%
    Staff cost 6.5% 5.7% 7.0% 5.8%
    Other expenses 18.1% 15.7% 18.9% 16.2%

  • In absolute terms, the company’s employee cost and other expenses have increased by 43% YoY and 41% YoY, however, as a percentage of sale basis they have come down. The gains may be attributed to the fact that the company has started witnessing economies of scale.

  • The robust growth at the operating level is not visible at the net level, net profit declined by 28% YoY resulting into 3.2% contraction in net margins. However, if one excludes the other income effect, net margins have expanded by 1.7% in 2QFY08 with bottomline witnessing a near five-fold jump in profits.

  • During the quarter, the interest and depreciation charges have more than doubled owing to the aggressive expansion plans. Going forward, the finance charges and depreciation costs would continue to remain on a higher side.

What to expect?
At the current price of Rs 650, the stock is trading at a price to earnings multiple of 89.3 times its trailing twelve months earnings. The ‘hive off’ of the different business divisions is being done keeping in mind the independent growth each division has achieved. The move is in line with the company's objective to concentrate on each division separately and unlock value in future. Meanwhile, expansion plans will continue to give fillip to topline and help achieve economies of scale over a long-term period. However, execution risk remains a concern. More importantly, the industry is susceptible to fluctuations in consumer spending.

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