Pantaloon: Capital constraints

The environment is better, but to grow fast the retailer needs money.

That Pantaloon has tempered the pace of growth and now wants to pursue a strategy whereby it earns a better return on investments is a good thing. Analysts point out that the return on capital employed in the retail business improved to 18.6 per cent in the year to June 2009 from 17.7 per cent in the previous year.

The scarcity as well as the high cost of capital had already forced the retailer to scale back its plans — compared with the 2.8 million sq feet that it added in 2007-08, Pantaloon added just 1.8 million sq feet in 2008-09. With rentals coming off and the capital per sq ft expected to be lower due to better inventory management and right-sizing of stores, Pantaloon is now looking to add around 2.5-3 million sq feet every year in the next three years.

However, this sounds a tad ambitious as it will require at least Rs 3,500 crore of capital and Pantaloon’s balance sheet is highly leveraged with a debt of Rs 2,850 crore at the end of June. The company is hoping to deleverage the balance sheet by roping in a strategic investor and raising Rs 1,000 crore. Only if that happens can Pantaloon hope to achieve its targets.

Nevertheless, with the economy recovering, the retailer should grow faster than it did in the first six months of 2009, when revenues increased by 25.6 per cent to Rs 6,342 crore (standalone). The growth in same store sales (SSS) for the value retailing business slowed to 7.4 per cent while that for the lifestyle retailing piece was just 6 per cent. With the value retailing growing faster and now fetching almost 72 per cent of the revenues, gross margins contracted by 30 basis points.

However, efforts to contain costs helped the retailer post better operating margins of 10.5 per cent, up 140 basis points, which pushed up the operating profit by 46 per cent. The net profit, however, grew just 13 per cent because of high interest costs.

With a wide range of formats and the aggression to build sale, Pantaloon is well-poised to cash in on the rising consumer spends in organised retail chains. Taking into account the value of the subsidiaries, IDFC SSKI attributes a sum-of-the-parts value of Rs 408 to the stock, which currently trades at Rs 343.