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| High debt mars Pantaloon's prospects | | The company needs to deleverage and improve same-store sales to reverse the trend of rising interest costs |
| Ram Prasad Sahu / Mumbai Feb 14, 2012, 00:27 IST |
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 The Pantaloon Retail stock fell 6.7 per cent to close at Rs 176.90 on Monday after the company posted worse-than-expected results (announced on Friday evening) for the quarter ending December 2011. Including Monday’s fall, the stock is down about 10 per cent in two days.
While the Street was expecting a muted quarter, with net profit seen falling 10 per cent on a 15 per cent rise in revenues, Pantaloon Retail’s net profit plunged a whopping 71 per cent, while revenues inched up just five per cent over the year-ago quarter.
The Pantaloon management said despite the festive season, the December quarter was among its weakest. However, it regained part of the sales momentum in January through end-of-season sales. It hopes falling apparel prices and improving consumer sentiment to reflect positively on sales in the near term. The Street, however, is not very confident and expects Pantaloon’s earnings to remain under pressure. Given that the company continues to expand, incurring capital expenditure, in the face of expectations of lower or muted sales growth, analysts have downgraded the company’s earnings by an average 30 per cent for the year ending June 2012 (FY12). Most are not positive on the stock in the near-term.
| RETAIL BIZ: PROFITS UNDER PRESSURE |
| In Rs cr |
Q2FY12 |
% chg y-o-y |
FY12E |
% chg y-o-y |
| Net sales |
2,893.3 |
4.9 |
12,205.0 |
10.8 |
| Ebitda |
265.0 |
9.1 |
1,122.0 |
16.9 |
| Ebitda (%) |
9.2 |
36 bps
|
9.2 |
48 bps
|
| Net profit |
13.5 |
-71.4 |
120.0 |
-36.8 |
Year ends in June Ebitda (%) change in bps E: Estimates
Figures are for the core retail business Source: Company, Prabhudas Lilladher |
Meanwhile, the company said it was taking measures to reduce its mounting debt, consolidate the value chain in its retail business and unlock value of its subsidiaries. It has formed a committee, which will suggest ways to realign existing businesses and divestments. The market hopes a noteworthy deal will be struck by mid-2012. Developments on multi-brand retail getting government nod for foreign direct investment could also provide a trigger for the stock.
Lacklustre growth, rising debt
The management cites the lacklustre offtake in the festive season and weak consumer sentiment, which resulted in postponement of purchase decisions, as reasons for its poor performance. Gautam Duggad of Prabhudas Lilladher in a recent report says poor consumer sentiment led to the company reporting a quarter-on-quarter (q-o-q) sales growth of about one per cent in a traditionally strong festive quarter and despite adding 0.62 million square feet of retail space. Same store sales (sales by stores in operation for more than a year) growth, which indicate demand trends, hit a three-year low (see chart).
 The slow growth in sales is despite the company continuing to add space. Core retail space grew three per cent sequentially to 16.34 million square feet.
The company, which added 1.4 million square feet in the first half of FY12, seems on track to meet the two million square feet target for the year. The expansion in space should help partly offset the pressure in overall revenue growth.
The other worrying aspect is inventory. While inventory per sq ft has dropped two per cent sequentially, Abhishek Ranganathan and Neha Garg of MF Global believe at Rs 2,341 per sq ft it continues to remain high.
High inventories and expansion of store network will keep interest costs and debt at elevated levels, at least in the near term. Interest costs were up 47 per cent y-o-y at Rs 158 crore (up 21 per cent compared to the September 2011 quarter) and now constitute about 60 per cent of Ebitda.
While standalone debt (Pantaloon, Central, ezone, Home Town businesses) rose sharply by Rs 654 crore to Rs 2,897 crore at the end of the December quarter compared to June 2011, analysts estimate the debt of core retail operations, including Big Bazaar and Food Bazaar, at a little over Rs 4,000 crore.
The good part is the company’s Ebitda margins improved on the back of a price increase, better product mix and by keeping its employee and other costs under control, say analysts.
Outlook
While the December quarter was bad, the situation, according to the Pantaloon management, has improved. Sales in January 2012 were 40 per cent of the entire December quarter. While this provides some comfort, the Street will be monitoring this to see if the trend sustains and whether it has come at the cost of margins, as some believe it is due to heavy discounts and promotions. Another positive for the company is the lower cotton prices, which if passed on to customers, could lead to a price decline and therefore, higher volumes.
While these are positives, it is also imperative that the company lowers its debt level. Unless this happens or business prospects improve meaningfully, the stock is likely to remain under pressure. Edelweiss Securities’ analysts in a recent report say, while they are positive on the long-term story, burgeoning debt and higher inventory days remain key concerns.
Abhijeet Kundu and Hardik Shah of Antique Stock Broking, who have a ‘sell’ rating on the stock, note in their report, “In view of the expected increase in debt and moderation in same store growth, we are reducing our FY12 and FY13 (EPS) estimates steeply by 47 per cent and 17 per cent to Rs 4.7 and Rs 8.8, respectively. Resultantly, our SOTP-based target price stands reduced by 15 per cent to Rs 154.”
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