Pantaloon Retail: Margin woes

While revenue growth is expected to be robust, investors need to be watchful about expansion in margin and stores.

Pantaloon Retail’s core retail revenues, which include value (Future Value Retail) and home (Home Solutions Retail) businesses, jumped 32 per cent year-on-year (y-o-y) to Rs 2,581 crore in the September quarter due to the pre-festive season buying.

Same-store sales (SSS) for all three formats –lifestyle, value and home retail – continued grew sequentially at 22 per cent, 13 per cent and 15 per cent, respectively.

However, the slippage in operating profit margins (OPMs) witnessed in 2009-10 continued. OPM dropped 120 basis points to 8.2 per cent due to a higher share of low-margin food category, lower full-price sales (discounted sales due to the pre-festive season buying), continued losses in the home business and muted margins in electronics. Relatively stable interest and depreciation costs (down 168 basis points at six per cent to sales) helped net profit grow 63.5 per cent to Rs 46 crore.

Going ahead, revenue growth should improve in the December quarter due to the festive season and strong SSS growth. Margins should also expand due to higher operating leverage, shift in the growth pattern towards the relatively higher margin fashion (apparel) category compared to mobiles and electronics, turnaround in the home solutions business and subdued rentals.

However, investors need to keep a tab on Pantaloon’s store expansion (flat at two per cent), working capital management and debt-to-equity ratio. The number of stores rose just 1.5 per cent to 603, much below expectations.

Overall, analysts are positive about the stock, which trades at one time and 0.6 time market capitalisation to consolidated 2009-10 and 2011-12 estimated sales, respectively. Based on the sum-of-parts valuation method, the stock has the potential to provide an upside of 25 per cent, given the average target price of around Rs 550.