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Pantaloon: New store momentum… - Views on News from Equitymaster

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Pantaloon: New store momentum…
Nov 26, 2007

Performance summary
  • The opening up of new stores has resulted into 80% YoY growth in topline during 1QFY08.

  • Operating profits reported a whopping 135% YoY jump, as costs grew at a slightly lower pace as compared to the topline.

  • The impressive show at the operating level is not reflected at the net level, mainly on account of lower other income, higher interest and depreciation expenses.

  • The net margins have actually expanded by 1.9% during 1QFY08 if one excludes extraordinary income earned during 1QFY07.

Rs m) 1QFY07 1QFY08 Change
Net sales 6,034 10,864 80.1%
Expenditure 5,626 9,908 76.1%
Operating profit (EBDITA) 408 956 134.6%
EBDITA margin (%) 6.8% 8.8%  
Other income 18 7 -58.3%
Interest 117 352 201.3%
Depreciation 67 153 128.3%
Profit before tax 241 459 90.1%
Extraordinary Item 338 -  
Tax 193 162 -15.9%
Profit after tax/(loss) 387 297 -23.2%
Net profit margin (%) 6.4% 2.7%  
No. of shares (m) 134 151  
Diluted earnings per share (Rs)*   7.7  
Price to earnings ratio (x)   88.3  
* 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’.

What has driven performance in 1QFY08?
New store momentum: During the quarter, the company has opened 27 stores expanding its retail space from 5.2 m sq ft to 6 m sq ft. The company is not only expanding its space but also is venturing into new segments in a move to have presence across formats and categories. Further the company is exploring opportunities in the value retail segment and general store kind of formats, which always have been able to attract more footfalls as compared to lifestyle segment or speciality retail format. Hence, expanding across categories has led to 80% YoY growth in total net revenues during 1QFY08. This we believe will continue to provide the necessary fillip to its topline and increase its economies of scale over the long term.

Has tightened the belt: As mentioned earlier, while the company is aggressively expanding into the value segment, margins from this business are lower as compared to the lifestyle segment. Despite this, the company has witnessed EBITDA margin expansion of almost 2% as the operating costs grew at a lower pace as compared to the topline. In the business of retailing and especially value retailing, one gains with economies of scale as there is hardly one can do to expand margins apart from improving performance in terms of supply chain or getting discounts from vendors (bargaining power).

Retailing is a game of volume and the robust growth in Pantaloon’s topline has led to the healthy 135% YoY growth in operating profits. This was not only on account of incremental sales that the company was able to clock but also on account of economies of scale as it could restrict growth in costs as compared to topline growth. Except for purchase of traded goods (as percentage of sales), which witnessed a rise, the company was able to restrict all its other costs (as percentage of sales).

Cost break-up (as % of sales)
Particulars 1QFY07 1QFY08
Increase/decrease in stock in trade -6.5% -12.9%
Raw materials consumed 1.7% 1.3%
Purchase of traded goods 70.7% 80.1%
Staff cost 7.5% 5.9%
Other expenses 19.8% 16.8%

Not bad as visible: Net profits fell by 23% YoY during 1QFY08. However, if one excludes the extraordinary item (profit on sale of investments) in 1QFY07, then the bottomline growth has galloped by 511% YoY. During the quarter, the company reported lower other income, higher interest and depreciation expenses owing to the aggressive expansion plans outlined by the company. Despite this, the company has reported a five-fold growth in net profits (excluding extraordinary items) mainly on account of low base effect and good show at the topline and operating level. Going forward, while the company will be able to maintain robust growth in the topline, the huge expansion plans may take its toll on margins.

What to expect?
At the current price of Rs 678, the stock is trading at a price to earnings multiple of 88 times its trailing twelve months earnings. The management has outlined aggressive growth plans to expand its different retail chains as a part of its strategy to generate 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 and the opening of new stores will take some time to translate into earnings. Meanwhile expansion plans will continue to give fillip to the topline and help achieve economies of scale over a long-term period. That said, from a medium perspective, the growth prospects seem to have been factored in the price. More importantly, the industry is susceptible to fluctuations in consumer spending. Therefore, overall we advise investors to exercise caution while investing in the stock.

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