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Pantaloon: Sustained profitability - Views on News from Equitymaster
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Pantaloon: Sustained profitability
Oct 24, 2009

Performance summary
  • On a standalone basis, revenues grow by nearly 17.6% YoY in 1QFY10.
  • Operating margins expand marginally by 0.5% on account of cost control measures taken by the company.
  • Despite higher depreciation and interest costs, profit margin remains stable at 2.4%. This is the result of four-fold growth in other income.


Financial performance snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 15,112 17,770 17.6%
Expenditure 13,563 15,869 17.0%
Operating profit (EBDITA) 1,549 1,901 22.8%
EBDITA margin (%) 10.2% 10.7%  
Other income 12 47 306.9%
Interest 684 869 27.0%
Depreciation & amortisation 319 433 35.6%
Profit before tax 557 647 16.1%
Tax 196 214 9.5%
Profit after tax 362 433 19.6%
Net profit margin (%) 2.4% 2.4%  
No. of shares (m) 159 174  
Diluted earnings per share (Rs)*   8.5  
P/E (x)   34.8  
* trailing 12-months

What has driven performance in 1QFY10?
  • During the first quarter, Pantaloon reported 17.6% YoY growth in topline backed by growth across segments. While value retailing segment has grown by 14% YoY, lifestyle retailing has reported nearly 23% YoY growth. Signs of slow and steady economic recovery seem to have pushed sales of lifestyle retail business too, especially with the onset of festive season.

  • During the previous quarter the management had indicated that the company is revamping its retail footprint at a cautious pace. It had closed down few unviable units. Thus, the growth in topline seems to have also come in on account of new store openings, improving ticket size, conversion ratio and higher average selling price.

  • The company has streamlined its operations in terms of inventory management. The full benefit of the same will start flowing in towards the end of FY10 and onwards. The company is also looking forward at renegotiating rentals and opting for revenue share model to lower rental costs. Apart from cost control initiatives, increased focus on private brands and high margin business has also enabled the company to report stable to marginal expansion in EBITDA margins.

  • In line with operating profits (grew by 22.8% YoY), bottomline has reported 19.6% YoY. The bottomline has grown at a slower pace on account of higher interest, depreciation and tax charges. Had the other income not reported a four-fold growth, profitability of the company would have been impacted.

  • The company has not put breaks on its expansion plans and is cautiously revamping its retail footprint. It is also looking at expanding in Tier II, while maintain dominance in bigger cities such as Tier I. This strategy is likely to help the company boost sales of both value as well as lifestyle retail business. 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.

What to expect?
At the current price of Rs 295, the stock is trading at a price to earnings multiple of 34.8 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 retail 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 help the company sustain profitability going forward.

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