Pantaloon Retail: Perils of being a big retailer

At a time when global retail giants like Tesco, Wal-Mart and Carrefour are waiting for a final decision on 51 per cent FDI in multi-brand retail to enter the Indian market, one of the country’s biggest retailer, Pantaloon Retail is reeling

under debt and inventory pressures. The entire last year proved to be disastrous for Pantaloon due to the imposition of excise duty on branded garments, increasing raw material costs, low demand and slow economy followed by a poor festive, winter season.

The company’s stocks fell after it announced worse-than-expected results of quarter ended December 31, 2011. While the market was expecting a muted quarter, with net profit falling 10 per cent on a 15 per cent rise in revenues, Pantaloon Retail’s net profit plunged a whopping 71 per cent, while revenues inched up just five per cent over the year-ago quarter.

According to a company statement, despite the festive season, the December quarter was among its weakest. It regained part of the sales momentum in January through end-of-season sales. But though the company is looking forward to a revival owing to falling apparel prices and improving consumer sentiment the Dalal Street is not very confident and expects Pantaloon’s earnings to remain under pressure. Keeping its expansion plans in mind incurring capital expenditure, in the face of expectations of lower or muted sales growth, analysts have downgraded the company’s earnings by an average 30 per cent for the year ending June 2012. High inventories and expansion of store network will keep interest costs and debt at elevated levels, at least in the near term. Interest costs were up 47 per cent y-o-y at Rs 158 crores (up 21 per cent compared to the September 2011 quarter) and now constitute about 60 per cent of Ebitda.

While standalone debt (Pantaloon, Central, ezone, Home Town businesses) rose sharply by Rs 654 crores to Rs 2,897 crores at the end of the December quarter compared to June 2011, analysts estimate the debt of core retail operations, including Big Bazaar and Food Bazaar, at a little over Rs 4,000 crores. Only positive thing, analysts say is the company’s Ebitda margins have improved on the back of a price increase, better product mix and by keeping its employee and other costs under control.

Meanwhile the Group has undertaken some constructive positive measures like reshuffling of senior positions, consolidation of the value chain in its retail business, appointment of a committee to suggest ways to realign existing businesses and divestments and overall restructuring to get rid of the debt burden. Once there is consensus over FDI, the company is looking forward to bounce back by attracting foreign investments.