Pantaloon: Top of the line

Capital needs for expansion can put pressure on the company's balance sheet despite listing subsidiaries

Future Group's Pantaloon Retail has reported a strong 80 per cent yearly growth in revenues to Rs 1,086 crore in the September 2007 quarter.

Despite its roll-out of more stores, the retailer's performance is somewhat surprising as this was the monsoon quarter and the festive season has been later than usual.

On the other hand, the Raheja-owned Shopper's Stop has reported a more muted 38 per cent rise in revenues to Rs 277.4 crore, while the Tata group's Trent has actually seen a marginal fall in sales.

However, the good topline showing hasn't translated into better gross margins for Pantaloon. That's because the cost of goods hasn't fallen. Also, Pantaloon's product mix has been changing in favour of lower value items, with the declining share of high-priced lifestyle items.

Nonetheless, the retailer managed operating margins of about 200 basis points at 8.8 per cent, to register the first increase in four quarters. Pantaloon's profit after tax has nearly doubled to Rs 30 crore after adjusting last year's profits.

The Rs 3,359.4-crore Pantaloon has aggressive growth plans of covering 20 million sq ft across formats by 2010, from six million sq ft at present.

That would include 240 Big Bazaars, 20 Home Towns and 98 Food Bazaars. It is also venturing into several ancillary businesses such as logistics and consumer financing, in an attempt to build an all-encompassing business.

While aggression may be the way to go, the capital requirements could put pressure on the company's balance sheet despite value unlocking by listing subsidiaries, Future Capital being the first.

The earnings growth is expected to fall by about 15 per cent in FY08, though there could be a big jump in 2009. The stock has been an outperformer in the past six months. It has gained 57 per cent as against 39 per cent registered by the Sensex. But a sum of parts valuation of Rs 700, as estimated, seems expensive.

Asian Paints: Shining colours

Asian Paints reported an improved performance in the September 2007 quarter, thanks to the strong demand from industrial paints segment comprising infrastructure and engineering projects.

The demand is typically sluggish in the decorative segment due to reduced demand from the construction sector in the monsoons.

Nevertheless, the company's consolidated operating profits grew 35.7 per cent y-o-y to Rs 181.6 crore in Q2, while its net sales expanded 13.5 per cent to Rs 1133.2 crore. Its operating profit margins also expanded 260 basis points y-o-y to 16 per cent in Q2 FY08.

The retailer's overseas operations also did better in the September 2007 quarter due to the strong demand situation in West Asia.

An appreciating rupee also helped in bringing down the company's adjusted consolidated raw material costs as a percentage of net sales by 140 basis points y-o-y to 56.7 per cent. In the June 2007 quarter, the company's operating profit margin had expanded 85 basis points y-o-y to 14.1 per cent.

The decorative segment demand will pick up, due to heightened construction activity in the post-monsoon season. However, the record crude oil prices could push up the input cost structure in the next few quarters.

A strong rupee should partially alleviate this problem. At Rs 1051, the stock trades at 28 times estimated FY08 earnings and 23 times FY09 earnings, if one considers the growth potential in the sector.

With contributions from Amriteshwar Mathur and Shobhana Subramanian