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Pantaloon: Chugging on

May 8, 2006

Introduction to results
Pantaloon Retail declared impressive third quarter results (fiscal year ending June 2006). Both the topline as well as the bottomline grew by over 50% during the quarter. However, operating margins were under pressure (down 30 basis points over the previous quarter). The topline growth, like in the previous quarters, was aided by the near 100% YoY growth in the value-retailing segment (Big Bazaar, Food Bazaar).

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 2,750 4,554 65.6% 7,143 12,926 81.0%
Expenditure 2,507 4,169 66.3% 6,502 11,879 82.7%
Operating profit (EBDITA) 243 385 58.4% 641 1,048 63.5%
EBDITA margin (%) 8.8% 8.5%   9.0% 8.1%  
Other income 3 5 46.7% 16 12 -21.2%
Interest 64 101 56.7% 190 237 24.9%
Depreciation 37 59 58.1% 103 142 38.4%
Profit before tax 145 230 58.9% 364 680 87.1%
Extraordinary income/(expense)     -     -
Tax 38 68 78.2% 86 197 129.1%
Profit after tax/(loss) 107 162 52.0% 278 483 74.1%
Net profit margin (%) 3.9% 3.6%   3.9% 3.7%  
No. of shares (m) 21.0 26.9   21.0 26.9  
Diluted earnings per share (Rs)*         22.0  
Price to earnings ratio (x)         87.7  
(* trailing 12-months)            

About the company
Incorporated in 1987, Pantaloon Retail is among the pioneers in chain retailing. It is the largest retailer in the country having over 100 stores across segments. Starting out with dedicated apparel stores (Pantaloon) the company has stores across the cross-section of the society. The company’s business is broadly divided into 2 segments, Lifestyle and Value retailing. At the end of 3QFY06 (March quarter 2006) it had the following formats of retailing. On the apparels front it has Pantaloon (21 departmental stores), Central Malls (3 seamless malls), Blue Sky (fashion accessories) and aLL (fashion apparel for plus size individuals). These stores can be classified under the ‘Lifestyle Retailing’. On the general merchandise front it has Big Bazaar (26 hypermarkets), Food Bazaar (45 supermarkets) and Fashion Station (5 fashion stores). These fall under ‘Value Retailing’.

What has driven performance in 3QFY06?
Robust as ever: As is apparent from the table below, the 81% YoY growth in net sales in 9mFY06 was led by a 121% YoY growth in the value-retailing business. ‘Big Bazaar’ has been the star performer for the company. At the end of the quarter (March 2006), it had 20 such stores, which constitute around a 1.2 m sq. ft. (including Food Bazaar). In January 2006, Big Bazaar witnessed the highest number of footfalls due to the ‘Exchange Mela’ (around 4 m). This provided the sales thrust and increased the sales/sq. ft. significantly (restricted to specific outlets). At the end of FY05, the sales/sq. ft. stood at around Rs 7,500, which we expect to be higher in the long-term (the full effect of the outlet expansion will start contributing meaningfully starting FY07).

Segmental Information
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Value Retailing 1,494 2,979 99.4% 3,993 8,817 120.8%
PBIT 110 234 112.1% 297 663 122.9%
Lifestyle Retailing 1,024 1,528 49.3% 2,629 3,958 50.5%
PBIT 162 215 32.3% 430 569 32.3%
Others 294 119 -59.4% 650 380 -41.5%
Net Sales 2,811 4,626 64.6% 7,272 13,155 80.9%

‘Pantaloon’ stores were the largest contributors to the 50% YoY growth in lifestyle retailing. Most of these stores have been operational for over twelve months and command higher sales/sq. ft. as compared to its other store ventures (in the range of 20% to 30%). Of the 19 operational stores, only 4 have been opened during the fiscal.

Margin worries: Like its peer companies, Pantaloon also has seen its operating costs grow at a faster rate than its sales growth on a YoY basis. Staff costs, as a percentage of sales, has increased from 4.5% in 9mFY05 to 5.2% in 9mFY06. The increase in staff costs is not only due to the expansion of outlets, but also on account of attrition (pay hikes). In order to curtail the high attrition rate, which the industry is witnessing, the company has had to review salaries/wages on a time-to-time basis. This has become an industry practice. Going forward, we believe that operating margins are likely to be at similar levels, given the expansion plans (it takes atleast 12 to 15 months for a new outlet to gain scale). The company would be increasing its total sq. ft. from 3.5 m in 9mFY06 to 10 m by FY08.

What to expect?
At Rs 1,932, the stock is trading at a price to earnings multiple of 87.7 times trailing twelve months earnings. The management has aggressive growth plans. In FY05, the company acquired a 51% stake in Liberty Footware towards its footwear initiative and a controlling stake in Galaxy Entertainment (movie screens and other entertainment avenues). Apart from these, it has identified ‘Home’ (home decorative and furniture), ‘Communications’, ‘Wellness’ and ‘Financial Products’ as new growth avenues (in total, 10 m sq. feet). Although the company has the wherewithal to fund the expansion, from an investors’ perspective, it is pertinent to have a long-term view. Otherwise, at current valuations, the downside risk is higher than the upside.

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