X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Pantaloon: Net margin blues - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Pantaloon: Net margin blues

Sep 27, 2007

Performance summary
  • Riding on the back of an industry wide growth phenomenon, on a consolidated basis the company has reported a 79% YoY growth in topline for the year FY07.

  • Operating costs grew at a faster pace than the topline putting downward pressure on operating margins of the company, which have contracted by 3.2% YoY.

  • The effect of strained EBITDA margins is reflected at the net level also.

  • On account of profit on sale of investments the company reported net margins of 1%. If one excludes the same, the company has actually reported net loss for the year on a consolidated basis.

  • The company has declared dividend of 25% and has decided to spin off its subsidiary, Future Ventures into a separate company and raise Rs 20 bn by selling its equity through public and private placement.

Financial snapshot
  Standalone Consolidated
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change FY06 FY07 Change
Net sales 5,764 10,196 76.9% 18,690 32,367 73.2% 19,337 34,686 79.4%
Expenditure 5,370 9,629 79.3% 17,223 30,211 75.4% 17,979 33,378 85.7%
Operating profit (EBDITA) 394 568 44.1% 1466 2156 47.0% 1358 1308 -3.7%
EBDITA margin (%) 6.8% 5.6%   7.8% 6.7%   7.0% 3.8%  
Other income 8 0   20 32 58.7% 37 79 116.0%
Interest 107 337 214.5% 369 898 143.1% 354 1,001 182.5%
Depreciation 66 126 90.9% 208 369 77.1% 227 482 112.5%
Profit before tax 228 105 -54.0% 909 921 1.4% 813 (96)  
Tax 80 96 19.6% 277 610 120.0% 286 597 109.1%
Extraordinary Item 10 177   10 889 8630.5% - 895  
Share of minority interest - -   - -   (10) (156)  
Net profit 158 187 17.9% 642 1,200 87.0% 537 357 -33.5%
Net profit margin (%) 2.7% 1.8%   3.4% 3.7%   2.8% 1.0%  
No. of shares (m) 27 147   27 147   27 147  
Diluted earnings per share (Rs)*         8.2     2.4  
Price to earnings ratio (x)         64.6     217.2  
(* trailing 12-months)

What is the company’s business?
Incorporated in 1987, Pantaloon Retail is among the pioneers in chain retailing. It is the largest retailer in the country having over 330 stores across segments in over 40 cities across the country, constituting over 5 m square feet of retail space. 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. On the apparels front it has Pantaloon (31 departmental stores), Central Malls (4 seamless malls as well as its other concepts). These stores can be classified under ‘Lifestyle Retailing’. On the general merchandise front it has Big Bazaar (51 hypermarkets), Food Bazaar (77 supermarkets) and Fashion Station (5 fashion stores) and other delivery formats. These fall under ‘Value Retailing’.

The board has approved setting up of two subsidiaries with an investment of up to Rs 50 m each. One will sell branded consumer goods (associated with cricketer Sachin Tendulkar) and the other for mobile communication equipment.

What has driven performance in FY07?
Robust topline growth: On a consolidated basis the company has reported a 79% YoY growth in topline for FY07 driven by growth in retail formats, new ventures and continuous opening of new stores in both the value and lifestyle retailing segment. Thus, riding on the back of an industry wide growth phenomenon, the company has reported a stellar topline growth during FY07 on account of growth across segments.

Consolidated cost break-up (as % of sales)
Particulars FY06 FY07
Raw materials consumed 66.0% 67.2%
Staff cost 6.3% 7.8%
Other expenses 20.6% 21.2%

Margins remain under pressure: While the company continued to perform strongly on the topline front, the intensifying competition has led to its margins bearing the brunt, by way of higher operating costs. The company’s operating costs grew at a faster pace than the topline putting downward pressure on operating margins of the company. Costs across the board have scaled up, which has led to the 3.2% contraction in EBITDA margins. The company's cost of operation has gone up by almost 86% during FY07. Staff costs (as percentage of sales) have increased by 1.5% on account of expansion of outlets, retention costs and the like. The margin pressure is likely to continue in the coming months as the company expands and opens new stores. The fact that the festive season has started might mitigate the pressure of rising costs.

Pricier growth: Though the other income was higher by 116% YoY, the bottomline grew at a slower pace than the topline owing to higher interest costs, depreciation costs and tax outgo. The effect of strained EBITDA margins has been reflected at the net level also. On account of profit on sale of investments the company could report net margins of 1%. If one excludes the same, the company has actually reported a net loss for the year on a consolidated basis. On a standalone basis, the company has actually reported a 0.3% expansion in net margin. Even if one excludes the extra ordinary income, the company has been able to book profits on a standalone basis. Thus, it is the poor performance of subsidiaries that has further exerted pressure on net margins.

What to expect?
At the current price of Rs 529, the stock is trading at a price to earnings multiple of 65 times its trailing standalone twelve months earnings. The management has aggressive growth plans to invest about Rs 60 bn in the coming years to expand its different retail chains as a part of its strategy to touch revenues of Rs 300 bn by FY11. The management’s focus on setting up new stores and looking at other related retail initiatives are expected to augur well from a long-term perspective. However, execution risk remains a concern. More importantly, the industry is susceptible to fluctuations in consumer spending. Therefore, we advise investors to exercise caution.

To Read the Full Story, Subscribe or Sign In
To Read the Full Story, Subscribe or Sign In


Small Investments
BIG Returns

Zero To Millions Guide 2019
Get our special report, Zero To Millions
(2019 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

FUTURE ENTERPRISES SHARE PRICE


Dec 18, 2018 (Close)

TRACK FUTURE ENTERPRISES

  • Track your investment in FUTURE ENTERPRISES with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

MORE ON FUTURE ENTERPRISES

FUTURE ENTERPRISES 5-YR ANALYSIS

COMPARE FUTURE ENTERPRISES WITH

MARKET STATS