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Pantaloon Retail: Job half done

Source : BUSINESS_STANDARD
Last Updated: Mon, Nov 12, 2012 19:40 hrs

Pantaloon Retail’s stock had gained 6.5 per cent in November till the announcement of its September results on Friday (post market hours) in anticipation of no negative surprises amid already low expectations. However, it lost 2.32 per cent on Monday (against flat Sensex) as the company disappointed on the profit front even as sales growth came in line with expectations. On the flip side, the announcement of de-merging the fashion business into a separate entity namely Future Fashion, transferring debt of Rs 1,226 crore and listing it later-on after issuing one share of the new entity for every three shares/DVRs in Pantaloon Retail are positive. The move is aimed at providing enhanced focus to the company’s individual businesses.

Says Kishore Biyani, chief executive officer, Future Group, “We grew multiple formats in the early stages of our growth, and now as each one of them has become sizeable, we are giving them independence to propel their growth. This consolidation will help create the base for the next phase of growth of the Future Group in modern retail.”

Earlier the company had also announced the sale of Pantaloon retail format to Aditya Birla Nuvo as well as Future Capital, which has helped the stock outperformance markets. While gains (in financial performance) from these moves will accrue in the coming quarters, keeping interest costs under control (estimated core retail debt of about Rs 2,500 crore post the three deals) and improving profitability in core retail businesses will now be crucial to further outperformance of the stock. Likewise, improvement in consumer sentiment (read: pickup in economic growth) and possible induction of a strategic partner will also positively influence the stock.
 

UNDER PRESSURE
In Rs crore FY12 Q1 FY13
Total op. income 11,793 3,060
% chg y-o-y 7.1 5.1
Operating profit 1,054.00 265
% chg y-o-y 9.9 4.5
Profit before tax 90 4
% chg y-o-y -68.4 -91.5
All figures pertain to Core Retail sales             Source: Company

Profit down on higher interest costs
The company’s net sales of Rs 3,060 crore and growth of 5.1 per cent was not bad considering muted consumer sentiments (read lower spend), extended end of season sale and festive season falling in December quarter.

On an average, analysts had expected sales of Rs 3,069 crore (growth of 5.4 per cent) for the September quarter. Same store sales growth (SSSG) in Value (3.6 per cent) and Home Retail (1.3 per cent) has come on expected lines of one-four per cent. Lifestyle Retail surprised with 6.5 per cent SSSG. With better control over costs (including reduction in staff expenses), operating profit margin has been maintained at 8.6 per cent, which is another positive. But significant jump in interest cost (35 per cent) led to 91 per cent year-on-year drop—higher than expected 73.5 per cent-- in core retail profit of Rs 4 crore.

Outlook
The company’s attempt to further simplify business structure and have three distinct listed entities namely Pantaloon Retail (hypermarket and supermarket chains), Future Fashion (fashion) and Future Ventures India (food and FMCG) will help grow the formats profitably and reduce the debt burden say analysts who have given thumbs up to the move.

Says Abneesh Roy, analyst, Edelweiss Securities, “We like the company’s move to simplify business structure which will help refocus on core retail business (help address slow SSG) and are enthused by the pick-up in deleveraging steps initiated by the company.” However, the process may take time and benefits are likely to flow in only over next couple of quarters.

After selling Pantaloon retail format to Aditya Birla Nuvo and now de-merging the fashions business, the new Pantaloon will have Big Bazaar, Food Bazaar, Home Town, eZone besides investments in subsidiaries involved in supply chain and sourcing among others. However, most of the sales will now come from value businesses (Big Bazaar and Food Bazaar), which yield lower margins unlike lifestyle related products. Thus, going ahead, the market will look forward to Pantaloon scaling up growth rates and improving profitability of the retail formats, which will help justify high current stock valuations.



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