Pantaloon Retail’s problems could escalate, if it fails to raise resources quickly to pare debt, say analysts tracking the company. Amid slowing sales and sagging cash flows, tackling the mounting debt burden is paramount among its string of problems.
While the country’s largest retailer’s market capitalisation stands at Rs 3,600 crore and equity base at Rs 3,141 crore, its consolidated debt is much higher. Aggressive expansion, which entails high capital costs, has led to the rise in consolidated debt from Rs 3,858.26 crore in 2008-09 to Rs 7,846.14 crore in 2010-11. Even at the stand-alone level, debt has risen sharply (by Rs 654 crore) since the June 2011 quarter to Rs 2,897 crore at the end of the December 2011 quarter. In comparison, its peers, Shoppers Stop and Trent, are at much more comfortable levels, with debt-to-equity ratios of 0.8 and 0.4 times, respectively.
The Street has punished the stock both on account of higher debt and the fact that it could not get foreign direct investment (FDI), as the government has put the multi-brand foreign investment policy on hold. The Pantaloon stock has fallen 36 per cent since June 2011. Unless the investors are convinced that the company’s fund-raising plans will bear fruit, the stock is likely to underperform, argue analysts.
D K Aggarwal, chairman and managing director of SMC Investments and Advisors, believes Pantaloon needs to raise Rs 500-600 crore to reduce debt, continue expansion and improve margins. “If it doesn’t sign any deal, debt will go up, and it is to be seen how it’ll manage cash flows,” Aggarwal said.
Rising debt is not only increasing its leverage, but also hurting its cash flows. For the December quarter, Pantaloon paid 61 per cent of earnings before interest, tax, depreciation and amortisation (Ebitda) as interest charges, against 45 per cent in the previous corresponding quarter. Analysts say it would need Rs 120-130 crore every quarter just to service its massive debt burden. “The company’s debt is going up and it is posting negative cash flows. If something concrete is not done immediately, it can really become a difficult situation,” said Aggarwal.
Higher interest outgo and rising expenditure mean little remains at the net profit level. “Interest outgo is eating into profits to a great extent,” said Sangeeta Tripathi, a retail analyst at Mumbai-based brokerage Sharekhan. While the company posted a negative cash flow of Rs 830 crore in 2010-11, analysts expect this to be around Rs 174.5 crore in 2011-12 and Rs 336.6 crore in 2012-13.
Net profit also dropped 71 per cent year-on-year (y-o-y) in the December quarter of 2011-12. Brokerage house Prabhudas Lilladher expects Pantaloon to report a bottom line of Rs 120 crore in 2011-12, 36.8 per cent less than the previous year. “Although we cannot say Pantaloon’s debt is unmanageable, as it has resources, we have seen in the past that once you run out of cash and make losses, debt becomes difficult to manage,” Aggarwal said, referring to other failed retail ventures.
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Operational headwinds
Even at the operational level, Pantaloon is facing many headwinds. In the December 2011 quarter, it reported its lowest same-store sales growth figures in over two years, indicating a fall in consumer spending. Same-store sales growth refers to the sales growth from stores in operation.
Rapid expansion amid slowing sales has led to rising inventory. Inventory per square feet has risen three per cent from Rs 2,323 per sq ft in the June quarter of 2010-11 to Rs 2,388 per sq ft in the December quarter of 2011-12 — an 18 per cent rise on a y-o-y basis.
While other retailers such as Shoppers Stop and Trent have cut back expansion plans and have taken a cautious approach, Pantaloon has been aggressively expanding. It expanded from 13 million sq ft in 2009-10 to 16 million sq ft in 2011-12.
With slowing sales, falling cash flows and rising debt burden, Pantaloon is forced to slow down its expansion speed. It is looking at adding 1.2 to 1.4 million sq ft in the coming years, if subdued demand continues. In 2011-12 (Pantaloon’s financial year ends in June), it’ll add two million sq ft, which is its annual target.
Rikesh Parikh, vice-president, equity strategies, Motilal Oswal Securities, said, “If it expands further, its cash flows will be squeezed. It needs that for paying interest and debt repayment.”
Course correction
Although a mail sent to the company did not elicit any response, Kishore Biyani, managing director of Pantaloon Retail, had recently said they were working on plans to make the company debt-free by March 2013. The plan includes getting investors in Big Bazaar and Food Bazaar, the company’s value formats, selling stake in financial services company Future Capital, merging electronics retail chain eZone with a Noida-based company, and parting with stakes in agribusiness venture Future Agrovet.
Higher valuations and logjam over FDI in multi-brand retail have hit the company’s plans hard, according to analysts.
“The market is not supportive of valuation it is seeking. That is the reason why it has not done any deal yet. It was expected if FDI was allowed, a lot of money would have come and helped retail companies, but that has not happened,” pointed out Parikh of Motilal Oswal Securities. “While the management remains hopeful of divesting its stakes in Future Capital and insurance ventures and reduce debt, timing for the same remains uncertain.”