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Pantaloon: On a firm footing

Sep 23, 2008

Performance summary
  • On a standalone basis, revenues grow by 56% YoY in FY08, while on a consolidated basis the growth stands a little higher at 68% YoY.
  • Cost control measures result in the EBITDA margins expanding by 2.5%.
  • On a standalone basis, net profits report tepid growth of 5% YoY. Excluding the extraordinary income earned last year, net profits report four-fold growth in FY08.
  • The consolidated net profits are lower by 38% YoY as expansion plans inflate depreciation charges and interest expenses. Besides this, new ventures are yet to break even.

Financial snapshot
Standalone Consolidated
Rs (m) 4QFY07 4QFY08 Change FY07 FY08 Change FY07 FY08 Change
Net sales 10,196 13,814 35.5% 32,367 50,489 56.0% 34,686 58,405 68.4%
Expenditure 9,629 12,402 28.8% 30,211 45,884 51.9% 33,378 55,400 66.0%
Operating profit (EBDITA) 568 1,412 148.7% 2,156 4,605 113.6% 1,308 3,005 129.8%
EBDITA margin (%) 5.6% 10.2% 6.7% 9.1% 3.8% 5.1%
Other income 0 1 100.0% 32 38 19.0% 79 259 227.7%
Interest 337 655 94.4% 898 1,853 106.4% 1,001 2,236 123.4%
Depreciation 126 254 101.3% 369 834 126.2% 482 1,182 145.0%
Profit before tax 105 504 379.2% 921 1,956 112.3% (97) (153) 59.0%
Tax 96 178 85.9% 610 697 14.1% 599 463 -22.8%
Extraordinary items 178 - 889 - 895 332
Share of loss of associate - - - - - (9)
Minority Interest** - - - - (157) (512)
Net profit 187 325 74.2% 1,200 1,260 5.0% 355 219 -38.3%
Net profit margin (%) 1.8% 2.4% 3.7% 2.5% 1.0% 0.4%
No. of shares (m) 147 159
Diluted earnings per share (Rs)* 7.9
Price to earnings ratio (x) 40.1
* 12 month trailing earnings

What has driven performance in FY08?
  • During the quarter, Pantaloon opened 18 stores expanding its retail space from 7.3 m sq ft to 7.9 m sq ft. On a standalone basis, the retail major reported a decent 36% YoY in topline in 4QFY08 and robust 56% YoY growth in revenues in FY08 backed by the new store openings and growth across its offerings. In FY08, value retailing and lifestyle retailing clocked nearly 60% YoY and 52% YoY growth respectively. Compared to other retail majors, the company has reported impressive numbers. This has been the result of increased penetration, increase in retail space and the company’s initiatives of venturing into new segments and exploring opportunities in the value segment. Moreover, the company’s old stores have also supported topline growth as same store sales grew by around 10% YoY.

  • Despite ambitious expansion plans, the company was able to contain costs. Generally it is observed that when the retailers are on an expansion spree, the operational costs scale up (as retailer expands retail space by rolling out new stores, its employee costs and other expenses increase). Apart from cost control initiatives, the company seems to have started enjoying benefits of economies of scale as all the cost heads as a percentage of sales declined. All of this resulted in a 2.5% expansion in EBITDA margins.

    Cost break-up
    Standalone Consolidated
    (% of net sales) 4QFY07 4QFY08 FY07 FY08 FY07 FY08
    Total Cost of goods 71.7% 69.5% 69.4% 69.6% 68.2% 66.9%
    Staff Cost 5.7% 4.9% 6.4% 5.4% 7.8% 7.6%
    Other Expenditure 17.0% 15.4% 17.6% 15.9% 20.2% 20.3%
    94.4% 89.8% 93.3% 90.9% 96.2% 94.9%

  • While EBITDA margins expanded, the net margins contracted by 1.2% in FY08 on account of extraordinary income that the company received last year. If one excludes the impact of the same, then the net profits witnessed four-fold growth that resulted in a 1.5% YoY expansion in net margins. This is despite the fact that aggressive expansion plans resulted in higher depreciation charges and interest expenses.

What to expect?
At the current price of Rs 317, the stock is trading at a price to earnings multiple of 40 times its trailing twelve months earnings.

The company’s aggressive plans will continue to give fillip to topline and help achieve economies of scale over a long-term period. Meanwhile, 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 the future. However, execution risk remains a concern. The company is exploring new formats and new ventures to tap the consumption basket, which will not only boost sales but will also help sustain margins. However, the industry is susceptible to fluctuations in consumer spending. This coupled with company’s huge expansion plans, rising costs and increasing competition may impact the company’s bottomline going forward.

  • Also read - Retailing: Upsides from here?

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