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Pantaloon: Leveraging hurts margins - Views on News from Equitymaster

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Pantaloon: Leveraging hurts margins

Sep 29, 2009

Performance summary
  • On a standalone basis, revenues grow by nearly 26% YoY in FY09, while consolidated net sales growth stands at 31% YoY.
  • Cost control measures result in expansion in the EBITDA margins by 1.4%.
  • On a standalone basis, net profits report growth of nearly 12% YoY.
  • The consolidated net profits decline by 54% YoY on account of poor show at the profit before tax level as a result of higher depreciation and interest outgo.

Financial snapshot
  Standalone Consolidated
Rs (m) FY08 FY09 Change FY08 FY08 Change
Net sales 50,489 63,417 25.6% 58,405 76,690 31.3%
Expenditure 45,884 56,733 23.6% 55,366 71,569 29.3%
Operating profit (EBDITA) 4,605 6,684 45.1% 3,039 5,122 68.5%
EBDITA margin (%) 9.1% 10.5%   5.2% 6.7%  
Other income 38 61 61.2% 557 958 71.8%
Interest 1,853 3,182 71.8% 2,236 4,185 87.2%
Depreciation 834 1,401 67.9% 1,182 2,066 74.7%
Profit before tax 1,956 2,162 10.5% 179 (172)  
Tax 697 757 8.6% 473 (100)  
Extraordinary items - -   (10) 13 -225.0%
Minority Interest - -   (512) (245)  
Share of loss of associate - -   (9) (58)  
Net profit 1,260 1,406 11.6% 219 101 -54.1%
Net profit margin (%) 2.5% 2.2%   0.4% 0.1%  
No. of shares (m) 159.3 174.4        
Diluted earnings per share (Rs)*   8.1        
Price to earnings ratio (x)   43.2        
* on a trailing 12-months basis

What has driven performance in FY09?
  • During the year, Pantaloon revamped its store counts across formats to 254 that include new store openings and closure of few unviable units. Its total retail footprint now spans across 9.7 m sq ft, with an addition of 1.9 m sq ft over that in FY08. Apart from the increase in retail space, the 25.6% YoY growth in net sales has come in on account of the company’s ability to increase footfalls and the conversion ratio. The footfalls have increased by 13.5% YoY, while the conversion ratio has increased from 41% in FY08 to 43% in FY09. The growth in sales is on account of 6% YoY growth in average ticket size and 14% YoY growth in average selling price. The company’s growth is indeed appreciable given the backdrop of economic slowdown.

  • The cost control measures did restrict growth in operating costs of Pantaloon that enabled the company to report 45% YoY growth in operating profits. The EBITDA margin expansion was restricted to 1.4% in FY09 as contribution of lifestyle retailing, a high margin business, dropped marginally to 28.1% in FY09 from 28.3% in FY08. Also, the same store sales (SSS) growth slowed down in case of lifestyle retailing to 6% as compared to 7.4%, while in case of value retailing, SSS growth expanded marginally by 0.3% to 10.3%. During an economic slowdown, discretionary spending takes hit as compared to necessity goods or daily consumption goods.

  • The company has not put breaks on its expansion plans and, it is cautiously revamping its retail footprint. While this is considered a good strategy, the new store openings continue to exert pressure on margins with increase in inventory, depreciation and interest costs. This increase in costs, which has come at a time when the retail sector growth has slowed down http resulted in 0.3% contraction of the wafer thin net margins to 2.2% in FY09. On standalone basis, the debt to equity ratio of Pantaloon Retail stood at 1.25 times as against 1.19 times in FY08.

What to expect?
At the current price of Rs 348, the stock is trading at a price to earnings multiple of 43.2 times its trailing twelve months earnings. The company has restructured its business segments and revamped its supply chain initiatives. The full benefit of these initiatives would be visible in FY10. Pantaloon has outlined aggressive expansion plans. However, it is marching ahead cautiously in the backdrop of slowing sector growth. 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.

Pantaloon has been able to report higher growth at the operating level on account of focused cost control measures and such initiatives are expected to support profitability going forward. However, one must note that profitability to some extent is boosted by change in inventory valuation method. On the bottomline front, apart from the slowing economy, ambitious expansion plans are likely to continue to exert pressure on company’s earnings on account of higher depreciation charges and interest costs.

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