Demand woes dent Pantaloon's prospects

Last Updated: Thu, Aug 09, 2012 19:30 hrs

A weak retail environment and muted sales growth saw Pantaloon Retail put in another quarter of below par performance. As a consequence, for the June quarter, while sales were up a feeble four per cent at its core retail operations, profit before tax was down 92 per cent compared to the year ago quarter. The Street was not impressed and consequent reaction saw the stock fall 5.25 per cent to Rs 151.45 on BSE.

The outlook for its retail operations remains sluggish given the deterioration of discretionary spending. Fitch Ratings, which had revised its outlook on the sector to negative from stable this week, indicated that private consumption was unlikely to improve unless consumer price inflation declines substantially or there is significant rise in wages. Neither seems a possibility in the short-term. Among the few positives include the improvement in operating profit margins and decline in inventory levels as a proportion of operational space, though the gains aren't significant.

In this backdrop, expect the stock to underperform over the near-term with key positive triggers being significant debt reduction and go-ahead for foreign direct investments to the tune of 51 per cent in multi-brand retail.

On the valuation front, JPMorgan analysts peg the sum of parts target for the company at Rs 160 comprising Pantaloon (Rs 129) and PRIL's stake in Future Supply Chain, Staples JV and insurance JV (Rs 32), which is close to its current price.

Slowdown bites

Same store sales growth for Pantaloon's various formats varied from negative one per cent to five per cent in the June quarter. The company blames the overall slowdown in the economy and the muted consumer confidence for its performance.

“Sales in May were particularly sluggish and this severely impacted same store sales (SSS) growth,” it says in an investor update. Over the last four quarters its same store sales (SSS) growth (which used to grow at double digits a year ago) has either fallen or been stagnant with the worst affected being its home retail segment. SSS indicates the revenues accrued from stores in operation for at least one year.

in Rs  crore Q4FY12* % chg y-o-y TTM2012** % chg y-o-y
Net sales  2,963 3.6 13,315 9.0
Ebidta  276 7.0 1,526 46.0
Ebidta (%) 9.3 30 bps 11.5 286 bps
Interest cost  180 52.5 1,053 68.2
PBT 5.7 -92.3 143 -49.0
Net profit      29.74 -78.9
* Core retail                            ** Consolidated, Trailing twelve months ended June  
Year ending till recently was June, which the company has extended by six months.  Hence, current year will be of 18 months ending December 2012
                                                                                        Source: Company, analyst reports

Same store volumes on the other hand are likely to have fallen 8-10 per cent, say Morgan Stanley analysts.

Other retailers too fared along the same lines. Shoppers' Stop saw its same store sales for its departmental store format grow just one per cent while volumes fell four per cent. Its larger format, HyperCity, fared worse with SSS and volumes falling seven per cent apiece. While retailers such as Pantaloon are enthused by the traditionally strong festive quarter ahead, analysts are not as confident.

Gautum Duggad of Prabhudas Lilladhar feels same store sales are likely to remain sluggish in forthcoming festive season.

Margins improve
The only bright spot in an otherwise gloomy performance was the fact that cost rationalisation measures undertaken by the company (as also other players in the sector) have started to kick in. Pantaloon’s Ebitda margins improved, led by better sales mix, given weak sales off-take for electronics/home products and significant cost-cutting measures (like lower employee headcount and lower marketing spends), say J P Morgan analysts led by Latika Chopra in a post-results note.

Shoppers' Stop, too, has kept its costs under control in a difficult environment. Pantaloons fared better with margins moving up 30 basis points (bps), while its smaller rival shed 330 bps on this count.

Additionally, there are some gains on the inventory management front. Morgan Stanley analysts wrote in the post-results note, “Management has put in requisite measures to improve efficiencies, but successful execution will be critical. It is difficult to judge overall progress on a quarterly basis, but we view improvement in inventory management in the fourth quarter (June quarter) as the key positive. Inventory days increased from 119 days in the third quarter of FY12 (March 2012 quarter) to 121 days in the fourth quarter (June quarter), but inventory per square foot declined three per cent sequentially.”

While these are some positives, unless the company makes further inroads on these fronts, their contribution to profitability will remain insignificant.

Deleveraging moves
Meanwhile, a significant rise in interest costs (up 68 per cent) led to net profit for Pantaloon’s consolidated operations falling 79 per cent to Rs 30 crore for the trailing 12 months ending June 2012 — interest costs in the core retail operations were up 52.5 per cent to Rs 180 crore (eating away most of the profit before interest and taxes of Rs 186 crore).

Going ahead, the company’s deleveraging efforts are likely to help save on interest costs on debt that is estimated at Rs 6,000 crore as of June. Centrum Broking analysts estimate the deleveraging moves (stake sale in PRIL to Aditya Birla Nuvo, allotment to Bennett, Coleman & Co and FCH stake sale to Warburg Pincus) will fetch the company Rs 2,360 crore. The company also plans further stake sales in its joint ventures and divestments to become debt-free by 2013 calendar year. If these plans are executed on expected lines, it should reflect positively on its financials and the stock.

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