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Pantaloon: Good growth, but already discounted

Pantaloon Retail's reported earnings per share (EPS) for the year ended June 2005, at Rs 18.9, was slightly ahead of analysts' estimates. This, coupled with the fact that the markets rebounded on Monday, led to an over 8 per cent jump in Pantaloon's share price. Monday's gain wiped out much of the loss the stock had seen last week, taking it within a striking distance of Rs 2,000.

At current levels, the stock trades at a little over 100 times earnings for the financial year ended June.

Earnings per share grew at 79.4 per cent (lower than its PE multiple) last financial year. Going forward, earnings growth rates are projected to come down, mainly because of an increase in the share of its lower-margin, value retailing business.

Last financial year, the value retailing business accounted for 67.4 per cent of incremental revenues. This business had earnings before interest and tax margins of 7.5 per cent, much lower than the 15.9 per cent margin the lifestyle retailing business enjoys.

It's important to note that Pantaloon's operating profit grew at 55 per cent last year, lower than the rate at which operating grew in the previous three financial years.

On a per share basis, operating profit grew just 43 per cent. EPS growth was higher at 79.4 per cent mainly because of higher other income and savings on interest as a percentage of sales.

Analysts expect debt funding of Pantaloon's projects to increase in the future, which means interest cost savings could cease.

The company started operations in Sangli, Maharashtra, a shift from the big towns the company normally operates in. One of the most optimistic estimates is of an earnings CAGR of 67.5 per cent over two years. On the other hand, its trailing PE is 100 times, giving it a high PEG ratio of 1.5 times.

Orissa Cement

The OCL India stock has gained almost 9 per cent to Rs 155 in the past two trading sessions on reports that two mutual funds have picked up a 7.4 per cent stake in the company from the promoters, the Dalmia group.

At the end of the June quarter, promoters held 74.96 per cent, institutional investors 0.78 per cent and public 18.07 per cent. Analysts highlight that an open offer would not be triggered since the stake purchased from promoters was less than 15 per cent.

Prior to this development, the stock had dipped about 9.5 per cent over the past one month compared with a 8.4 per cent gain in the BSE Mid - Cap index.

Although the company's key cement business has been performing better thanks to approximately 10 per cent growth in volumes in the first five months of FY 06, in its largest market Orissa, but investors have been worried about its sponge iron and refractory business. Both these divisions have been grappling with higher operating costs.

For instance, in the case of sponge iron, inputs such as iron ore and pellet have risen and the refractory business had to wrestle with higher alumina and graphite prices. These two divisions accounted for about 44 per cent of segment revenues in the June quarter.

In the last quarter, a larger turnover base helped neutralise the impact of rising input costs and it helped overall operating profit margin rise marginally to 19.38 per cent.

To leverage strong cement demand in its Orissa market, the company is planning to expand its cement capacity to two million tonne. Despite the recent run-up in the stock, the company has a discounting of about 4.5 times trailing earnings.

Tea time for Britannia

Tea and biscuits make a good combination""""possibly why Britannia wants to buy a foreign tea brand. It has reportedly thrown its hat in the ring for for Typhoo Tea, which belongs to Premier Foods, and is the third-largest tea brand in the UK.

At a reported 100mn GBP, Britannia, if its bags the deal, would be paying around 0.7 times sales ""CY2004 sales for the beverages division was around 140 mn GBP, down 2 per cent y-o-y.

Operating profit before exceptionals for the divisions in CY04 was around GBP 32 mn, up 18. 6 per cent thanks to lower input prices. However, sales for HICY06 were just 66 mn GBP, down 6 per cent. While the mainstream tea market has not been doing well, herbal and fruit teas, which Premier sells, are becoming more popular. If the trend catches on in India, one could argue that Britannia is foraying into a potential growth area.

The other reason is that Britannia's bakery sales have not been doing too well""the company's market share is believed to have fallen. In fact in Q1FY06, the top line grew just 2.7 per cent y-o-y, with volumes remaining flat.

For FY05 sales were up 10 per cent y-o-y lead by volume growth especially of the flagship brand Tiger, which accounts for approximately a third of revenues. Margins have been under pressure but the company has benefited from tax sops at the new Uttaranchal unit.

At the current price of Rs 1,200, the stock trades at around 17 times estimated EPS for FY06 and 15 times estimated FY 07 earnings. If the deal goes through (there are other strong contenders in the field), it will be a very substantial addition to Britannia's business, and the potential for a re-rating exists.

With contributions by Mobis Philipose, Amriteshwar Mathur and Shobhana Subramanian