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Pantaloon: Capex arrests growth - Views on News from Equitymaster

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Pantaloon: Capex arrests growth
May 7, 2009

Performance summary
  • Topline grows by 21% YoY in 3QFY09 mainly led by growth in the value retail business.
  • Tight control over costs leads to 2.1% expansion in EBITDA margin.
  • While operating profits report whopping 52% YoY growth, bottomline reports single digit growth of 7% YoY. Higher depreciation charges and interest costs eat into the profitability of the company.
  • During 9mFY09, topline grows by 28% YoY, while bottomline grows by 11% YoY.


Financial performance snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 13,543 16,421 21.2% 36,675 46,790 27.6%
Expenditure 12,402 14,691 18.5% 33,482 41,938 25.3%
Operating profit (EBDITA) 1,141 1,730 51.6% 3,194 4,852 51.9%
EBDITA margin (%) 8.4% 10.5%   8.7% 10.4%  
Other income 17 16 -3.0% 37 43 15.7%
Interest 429 847 97.6% 1,198 2,273 89.7%
Depreciation & amortisation 223 369 65.1% 580 1,012 74.5%
Profit before tax 506 530 4.8% 1,453 1,610 10.8%
Tax 185 186 0.8% 518 569 9.8%
Profit after tax 321 344 7.1% 934 1,041 11.4%
Net profit margin (%) 2.4% 2.1%   2.5% 2.2%  
No. of shares (m)       155 159  
Diluted earnings per share (Rs)*         8.6  
P/E (x)         25.4  
* trailing 12-months

What has driven performance in 3QFY09?
  • Pantaloon Retail’s topline grew by 21%YoY in 3QFY09. While the growth slowed down, it is still appreciable considering that the other retail majors are struggling to report double digit growth. The growth came in on account of promotional efforts that boosted sales across offerings but was largely backed by its value retailing business. The value retailing business that contributes 60% to total revenues reported 31% YoY growth in revenues, while the lifestyle business clocked 26% YoY growth.

  • Slowing economy had impacted spending power of individuals. While marketing and promotional efforts boosted sales, sales growth of existing stores slipped to single digits. In case of value retailing, same store sales (SSS) reported a muted 7% YoY growth during the quarter. The slow growth in same store sales indicates that the company has failed to generate more revenues on the same footage. Thus, overall growth was largely backed by new store openings, which is not an encouraging sign. Ability to generate more sales from same footage not only leads to economies of scale but also indicates that the company is the only preferred retailer.

  • As costs grew at a slower pace as compared to the topline, operating profits witnessed a robust 52%YoY growth during 3QFY09. On a percentage of sales basis, consumption of raw materials increased, while the company was able to curtail other cost heads. Though the exact reason behind the same is not known, it could be on account of piled up inventory. Reduced footfalls meant that volumes were on the lower side. This in turn impacted inventory turnover; a phenomenon which has been observed across the industry.

  • The robust growth witnessed at the operating level did not flow down to the bottomline on account of higher depreciation and interest costs. As such net profits reported a single digit growth of 7% YoY.

  • Pantaloon has planned to restructure the business by re-aligning the business verticals into separate legal entities. This is likely to help the company identify growth prospects of business verticals separately and accordingly plan capital infusion and expansion. Accordingly, the board has approved the company’s plans to rechristen Pantaloon Retail as ‘Future Markets and Consumer Group Ltd’ and to form separate subsidiaries that will cater to the retail business (Future Consumer Enterprises Ltd or FCEL) and the fashion business (Future Merchandising Ltd or FML). The board has also approved issuing preferential shares to promoters, warrants and private equity to raise funds for expansion plans. A total capital of approximately Rs 15 bn would be infused out of which Rs 12 bn would be brought in by way of stake sale to private equity.

What to expect?
At the current price of Rs 218, the stock is trading at a price to earnings multiple of 25.4 times its trailing twelve months earnings. Pantaloon has outlined aggressive expansion plans. Moreover, the company is exploring new formats and restructuring business verticals to identify growth prospects of each segment separately. These moves are expected to augur well from a long term perspective once there is a revival in the economic cycle. In the medium term, however, apart from the slowing economy, ambitious expansion plans are likely to continue taking its toll on company’s earnings on account of higher depreciation charges and interest costs.

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