Pantaloon's core retail business shows improvement

Re-rating might take a while, as benefits of restructuring could take longer to translate

It's been a tough ride but Kishore Biyani's Pantaloon Retail could be on the mend. For starters, the December quarter numbers suggest that the company's core retail business is showing double-digit growth after several quarters of anaemic growth. In the December quarter (which was the sixth and final quarter of the company's financial year as it is changing its financial year), Pantaloon's core retail sales grew 10 per cent year-on-year to Rs 3,170 crore. The company's net profit from core retail operations also fell 63 per cent to Rs 7 crore in the quarter.

Though both revenues and profit figures are lower than the market's expectations, the company appears focused on improving operational efficiencies. Same store sales growth for the quarter in lifestyle retail stood at 12.7 per cent, the highest in eight quarters. However, value retail grew 5.1 per cent and the home retail business showed a decline of 3.4 per cent. Food retail has been hit hard and this is reflected in the performance of large fast-moving consumer goods players too, which have seen their food sales post lacklustre growth.

The company believes that things are beginning to improve as the festive season saw sales picking up on pent-up demand. Categories like footwear, fashion and home appliances, which were hit hard in the previous quarters, have seen an uptick and that too, at full price. However, sales slowed in the last two weeks of December, which saw a build-up in inventory and consequently impacted profitability, too. The company also believes that the end of the sale season in mid-February was a positive, compared to last year when the sale had extended till March.

Over the last few years, the company has been struggling with a huge pile of debt. Pantaloon has taken several steps to lower the debt and become more efficient in the last 18 months. Its interest outgo has come down from Rs 176 crore in the September quarter to Rs 157 corer in the December quarter. The company's current debt stands at Rs 6,000 crore and if the requisite approvals for the demerger of Pantaloon Retail comes through in March and asset sales see completion, then the company's debt would come down to Rs 2,000 crore. UBS Investment Research says: "Our 'Buy' rating is underpinned by our expectation of an improvement in discretionary spending, which is currently at a low ebb, and PRIL's restructuring, which we expect to be value-accretive."

The view on consumer sentiment is not uniform across brokerages, though. Motilal Oswal Financial Services has a 'neutral' rating on the stock as its channel checks suggest that the festive season's momentum did not spill over into January-February. Analysts are choosing to wait for the benefits of restructuring to flow in before re-rating the stock.