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Pantaloon: Rationalising costs - Views on News from Equitymaster
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Pantaloon: Rationalising costs
Apr 28, 2008

Performance summary
  • Revenues grow by 57% YoY during the quarter on the back of growth across its offerings. In 3QFY08, value retailing and lifestyle retailing clocked almost 50% YoY and 38% YoY growth respectively.

  • The growth in costs is tad lower compared to the topline growth that has resulted in 89% YoY growth in operating profits.

  • Net profits (clocked 72% YoY growth) have grown at a slower pace in 3QFY08 compared to operating profits because of higher interest and depreciation charges.

  • For the period ended 9mFY08, though it seems that net profits have declined by 8% YoY, excluding the impact of extraordinary income (profit on sale of investment), the same have tripled.

Financial performance snapshot
Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 8,611 13,543 57.3% 22,171 36,675 65.4%
Expenditure 8,008 12,402 54.9% 20,591 33,482 62.6%
Operating profit (EBDITA) 603 1141 89.3% 1580 3194 102.1%
EBDITA margin (%) 7.0% 8.4%   7.1% 8.7%  
Other income 9 17 75.5% 31 37 18.2%
Interest 229 429 87.3% 553 1,198 116.7%
Depreciation 93 223 139.2% 243 580 139.2%
Profit before tax 290 506 74.5% 816 1,453 77.9%
Extraordinary Item - -   711 -  
Tax 103 185 80.0% 514 518 0.8%
Profit after tax/(loss) 187 321 71.5% 1,013 934 -7.8%
Net profit margin (%) 2.2% 2.4%   4.6% 2.5%  
No. of shares (m)       141 155  
Diluted earnings per share (Rs)*         7.2  
Price to earnings ratio (x)         70.4  
(* trailing 12-months)

What has driven performance in 3QFY08?
  • During the quarter, the company opened 20 stores expanding its retail space from 6.7 m sq ft to 7.3 m sq ft and has witnessed 57% YoY growth in topline. In 3QFY08, value retailing and lifestyle retailing clocked 50% YoY and 38% YoY growth respectively. As compared to 9mFY07, growth in 9mFY08 has slowed down and this may be attributed to the slow growth of same store sales and intensifying competition. Increased penetration is expected to augur well for the company going forward as it will not only expand reach but may also lead to economies of scale.

    Cost break-up
    (% of sales) 3QFY07 3QFY08 9mFY07 9mFY08
    Increase/decrease in stock in trade -11.1% -8.1% -10.5% -11.1%
    Raw materials consumed 1.4% 1.6% 1.5% 1.4%
    Purchase of traded goods 77.2% 76.8% 76.1% 79.3%
    Staff cost 6.2% 5.4% 6.7% 5.6%
    Other expenses 19.3% 15.9% 19.0% 16.1%

  • The growth in costs is tad lower compared to the topline growth. The same is justified by a shrinking cost to sales ratio, which has led to 1.4% expansion in EBITDA margins in 3QFY08 and 1.6% in 9MFY08. This has largely come in on account of rationalization of employee expenses and other expanses, which as a percentage of sales basis have contracted by 0.8% and 3.4% respectively during 3QFY08 as compared to the same period last year. Otherwise, the company’s gross margins are under pressure and have contracted by 2.8% in 3QFY08 as compared to 3QFY07.

  • The net profits (clocked 72% YoY growth) have grown at a slower pace in 3QFY08 compared to operating profits, simply because the company is in expansion spree, which has resulted in higher interest and depreciation charges. The increased taxes have also exerted pressure on net margins to some extent. Thus, owing to increased finance and corporate charges, net margins have expanded by merely 0.2% during the period under consideration. For the period ended 9mFY08, though it seems that net profits have declined by 8% YoY, excluding impact of extraordinary income (profit on sale of investment), the same have tripled.

What to expect?
At the current price of Rs 507, the stock is trading at a price to earnings multiple of 70.4 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.

Going forward, the finance charges and depreciation costs would continue to remain on a higher side owing to ambitious expansion plans outlined by the company. While on schedule expansion plans will continue to give further fillip to the topline, intensifying competition is expected to pressurise margins. The same can be countered with judicious mix of labels and with economies of scale as expansion plans progress.

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