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Pantaloon: Benefits from consumption rebound - Views on News from Equitymaster
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Pantaloon: Benefits from consumption rebound
Jan 27, 2010

Performance summary
  • Revenues grow by nearly 25.4% YoY in 2QFY10 led by growth across offerings - Value retailing & life style retailing.
  • Operating margins expand marginally by 0.3% as costs grow at a slightly lower rate as compared to growth in net sales.
  • Strong show at the operating level and less than proportionate growth in interest costs and depreciation leads to the 47% YoY growth in profit before tax (PBT).
  • Net profit growth stands at 51% YoY during the quarter.
  • With effect from 1st January, 2010 the company has transferred its Value retail business to Future Value Retail Ltd. on a going concern basis through slump sale. The move is part of the restructuring plan outlined by the company.


Financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 15,257 19,128 25.4% 30,369 36,899 21.5%
Expenditure 13,684 17,094 24.9% 27,247 32,963 21.0%
Operating profit (EBDITA) 1,573 2,034 29.3% 3,122 3,936 26.1%
EBDITA margin (%) 10.3% 10.6%   10.3% 10.7%  
Other income 15 20 32.9% 27 67 151.5%
Interest 742 835 12.6% 1,425 1,704 19.5%
Depreciation & amortisation 325 452 39.2% 644 885 37.4%
Profit before tax 522 768 47.0% 1,080 1,415 31.0%
Tax 187 261 39.7% 382 470 22.9%
Profit after tax 335 507 51.1% 697 945 35.5%
Net profit margin (%) 2.2% 2.6%   2.3% 2.6%  
No. of shares (m)       159 190  
Diluted earnings per share (Rs)*         8.7  
P/E (x)         47.6  
* trailing 12-months

What has driven performance in 2QFY10?
  • During the 2QFY10, Pantaloon reported 25.4% YoY growth in topline backed by growth across segments. While value retailing segment has grown by nearly14% YoY, lifestyle retailing has reported nearly 25% YoY growth. The robust growth in lifestyle business highlights the rebound in consumption. Apart from slow and steady economic recovery, festive and marriage season seem to have pushed sales of lifestyle retail business.

  • Earlier the management had indicated that the company is revamping its retail footprint at a cautious pace. It had closed down few unviable units. In 2QFY10, the company has added 1.9 m sq. feet taking the total retail area under operation to 10.3 m sq. feet. Year on year basis the increase in number stores across formats stands at 45 to 276 stores. This may force one to conclude that the growth has come in on account of new store openings. However, a look at same store sales growth provides a different perspective. Same store sales in case of value retailing business reported 6.9% YoY growth, while lifestyle retail business reported 11% YoY growth. Additionally the company has also witnessed higher conversion ratio and concentrated on improvement in ticket size and average selling price. All of this enabled the company sustain 25% plus growth in topline.

  • The company has streamlined its operations in terms of inventory management. The benefits of the same seem to have started flowing in as cost of raw materials consumed as a percentage of sales basis has come down to 61.6% in 2QFY10 from 62.7% in 2QFY09. The company is also looking forward at renegotiating rentals and opting for revenue share model to lower rental costs. Apart from cost control initiatives, increased focus on private brands and high margin business (such as lifestyle business) has also enabled the company to report stable to marginal expansion in EBITDA margins.

  • Profit before tax (PBT) grew by 47% YoY on the back of 29% YoY growth in operating profits and less than proportionate growth in depreciation and interest costs. Slower pace of growth in tax charges has further supported growth in earnings. On account of all these reasons, net profits grew by robust 51% YoY.

  • The company has not put breaks on its expansion plans and is cautiously revamping its retail footprint. It is also looking at expanding in Tier II, while maintain dominance in bigger cities such as Tier I. This strategy is likely to help the company boost sales of both value as well as lifestyle retail business. The company is also streamlining its operations into three business verticals - retail, financial services, and support activities. As a part of the restructuring plan, the company has transferred its Value retail business to Future Value Retail Ltd on a going concern basis through slump sale with effect from 1st January, 2010.

What to expect?
At the current price of Rs 414, the stock is trading at a price to earnings multiple of 47.6 times its trailing twelve months earnings. The company has restructured its business segments and revamped its supply chain initiatives. As the company has achieved scale and plans to focus on maintaining its return on capital, it has decided to vigilantly expand its retail space across India. Hence, it is expanding its retail footprint on a cautious note. These moves are expected to augur well from a long term perspective once there is a revival in the economic cycle.

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