Pantaloon: Slip is showing

Competition, promotions will keep margins under pressure

Pantaloon Retail's numbers for the June 2007 quarter are disappointing "" a 57 per cent fall in adjusted net profit to Rs 6.8 crore on revenues of Rs 1,019 crore, which rose 77 per cent y-o-y.

What's of concern is that the growth in sales was driven by new space addition rather than a rise in same store sales. Given that the numbers were way below Street expectations, the stock lost 2.5 per cent on Thursday to close at Rs 525.

The shift in product mix "" resulting in more sales of value products rather than lifestyle products "" has resulted in lower margins. While the gross margin fell sharply by 550 basis points, the operating profit margin was down by 90 basis points to 5.6 per cent.

There has been a huge increase in operating expenditure, especially raw material costs and, ostensibly, Pantaloon was not able to pass this on.

The management has also, perhaps, stepped up promotional activity to push sales. With competition on the rise, Pantaloon will need to keep up promotions and, therefore, margins could continue to be under pressure.

The company had earlier said it would change the accounting policy for valuing inventories from the mark down on sales method, to the retailing method, a more prudent way of valuing inventories.

The change, however, has not been made in the June quarter. Had the change been effected, the margins might have been further impacted.

The consolidated numbers too have been disappointing with subsidiaries, including Home Solutions and Future Capital, turning in an operating loss of Rs 85 crore .

As a result, the consolidated entity posted a profit before tax (PBT) loss of Rs 9.6 crore. The stock has been an underperformer vis the vis the Sensex for the last six months and at the current price of Rs 525, it trades at 55 times estimated FY08 earnings. Given the cost of rolling out stores and the competition, it appears to be rather expensive.

Lupin: That Cramp-ed feeling

Lupin is focusing on ramping up its contract research and manufacturing segment (Crams) aggressively and as part of that strategy it has acquired Gujarat-based Rubamin Laboratories for an undisclosed sum.

Rubamin Laboratories manufactures advanced intermediates for APIs through Crams and it is understood to have achieved a turnover of approximately Rs 40 crore in FY07.
Prior to this acquisition, Lupin derived only a small proportion of its net sales of Rs 1971 crore in FY07 from the Crams segment, highlight company officials, and the company is optimistic of ramping up this proportion in the medium term.

It is understood that this acquisition will be EPS accretive for Lupin in the first year itself. The Lupin stock rose 0.8 per cent to Rs 585 on Thursday.

It is anticipated that Lupin would also leverage Rubamin's existing facilities to meet a part of its raw material requirements for its existing operations.

Prior to this acquisition, Lupin had a presence across the value chain""from APIs to finished products "" but the management had been able to expand its presence in the higher margin formulations segment (they constitute about 60 per cent of its sales currently compared with less than 40 per cent four years back).

As part of that strategy, the company had widened its product range from its well established therapeutic segments such as anti-TB and cephalosporins to ceftriaxone (medication for treating bronchitis) and perindopril (medications to treat high blood pressure). In addition, Lupin has been ramping up its presence in the global generics market.

In the June 2007 quarter, the operating profit margin improved 515 basis points y-o-y to 17.3 per cent in Q1 FY08.

The stock trades at 15 times estimated FY08 earnings, excluding the latest acquisition.

With contributions from Shobhana Subramanian and Amriteshwar Mathur