Frayed numbers

Pantaloon Retail's June quarter results disappoint

Pantaloon Retail recently announced results for the quarter and year ended June 2004. Sales grew at a healthy pace of 46.4 per cent in the June quarter, more or less in line with the 48.8 per cent growth recorded in the nine months till March 2004.

But the annual sales of Rs 658 crore fell short of the Rs 680 crore figure expected by analysts. Worse still, profit before exceptionals and tax rose just 4.3 per cent, weighed down by a 65 per cent jump in interest cost and a 60 basis points drop in operating margin. In the nine months till March 2004, profit before exceptionals and tax had doubled to Rs 19.5 crore.

The main reason for the lower profit growth in the June quarter was higher interest cost, which in turn was owing to higher debt. But with business expected to grow at a fast pace going forward, the spike in interest cost (as a percentage of sales) in the June quarter could be an aberration.

After all, the company is expected to expand its retail space to 2 million square feet from the current levels of 1.1 million square feet. That's a growth of over 80 per cent.

Thus far, the management has achieved its ambitious targets as far as revenue targets go. But it remains to be seen whether earnings growth would keep pace going forward.

Based on current prices, Pantaloon trades at a trailing PE of 40 times and a forward PE of 23 times, which seems high for a mid-cap stock. However, considering the high growth prospects, it makes sense to look at the PEG (trailing PE/expected growth rate).

This works out to around 0.6. Also, Pantaloon's promoters seem to be cashing in - their holding has come down from around 52 per cent in June 2003 to less than 40 per cent as on June 2004.

Pfizer India

MNC pharma stocks like Pfizer India have gained around 23 per cent over the last 7 weeks as investors bet that transnational pharma companies will outperform their domestic counterparts.

However, Pfizer's results for the quarter ended August 04 aren't particularly encouraging "" profit before exceptional items and taxation has risen merely 3.2 per cent to Rs 23.32 crore.

In the key pharmaceuticals segment, sales of Becosules and Corex have no doubt been strong. However, Gelusil has only recently been reintroduced following the problems relating to quality earlier this year and it is understood that the full sales potential of this product has yet to be realised by the company.

Hence segment revenues have dropped 2.86 per cent to Rs 121.13 crore in the August quarter. However, marketing efficiencies helped improve realisations for products like Becosules and Corex, and, coupled with high margins earned by the company on Gelusil, ensured segment profits grew 23.7 per cent to Rs 28.02 crore.

In the animal health division, improved sales of Amoxisol and Distodin helped segment profits rise 20.5 per cent to Rs 2 crore in the August quarter.

The company has been shutting or selling unviable plants and employee numbers have also been reduced, and these measures will help lower costs going forward.

Pfizer's product launches have been scarce, but there have been the usual reports that the company may consider launching them once the new patent regime comes into force in 2005. Introducing new products will be critical if the company expects to maintain a price-earnings multiple of around 38.

The stock market and small investors

The Indian stock market's market capitalisation may have taken a big stride this year to touch $250 bn, but small investors are not too keen to partake of this growth.

They put in just Rs 5847 crore into shares and debentures last fiscal, marginally more than in 2002-03 and much lower than the Rs 7829 crore in 2001-02.

As a percentage of the growth in small savings of Rs 60,873 crore in 2003-04 over the previous year, this amounted to less than 10 per cent. Obviously, people still prefer fixed deposits which grew 28 per cent in 2003-04 to Rs 179,183 crore.

Why is there such little faith in the equity markets? One reason has been the attractive rate offered on risk-free fixed income paper such as the RBI bonds, NSC and the public provident fund. With risk-free rates such as these, who would want to risk hard earned money in the equity markets?

But with real rates of return negative across fixed income products, investors could now turn their sights to the equity markets. Trading is now easier and the abolition of long-term capital gains tax adds to the attraction.

Over the past few years, regulators have also cleaned up the system. Mutual funds are doing their bit by launching systematic investment plans(SIP) which allow investors to put in as little as Rs 1000 per month.

A new version is the systematic transfer plan where only the interest earned from debt schemes is invested in equity so that the investor does not risk any capital.

Will investors bite? The numbers for first quarter tells us that small savings are up smartly by Rs 68,673 crore compared with first quarter of FY03 which means savers still find them extremely attractive.

With contributions by Mobis Philipose, Amriteshwar Mathur and Shobhana Subramanian