The retail run

BS Compass

According to a news report, the organised retailing sector in India has grown 15 per cent in the period from June to August 2003. Industry sources say that the healthy trend in growth is expected to continue, what with slew of festivals round the corner. Besides, consumer confidence has increased thanks to the pick up in the economy and the jump in the equity markets.

Since the rally began four months back, the two major listed retail stocks, Trent and Pantaloon Retail have shown different trends. While the Trent stock has risen 28 per cent, clearly underperforming the broad market, the share price of Pantaloon Retail has jumped almost 230 per cent.

One reason for this is that the Trent stock had already received a massive re-rating (from the Rs 70 levels to over Rs 170) in early 2002, during which time Pantaloon had hardly participated in the rally.

More importantly, Pantaloon now stands much better poised to benefit from the growth in the share of organised retail in the country. Some time earlier, the company was present only in the clothing segment, which accounts for only around 8 per cent of the consumer's wallet.

After the launch of Big Bazaar and Food Bazaar, the company enjoys approximately a 70 per cent share of the wallet. Trent's exposure, however, is still within the clothing and furnishing segments through its Westside chain of stores. The company has also announced a foray into supermarkets, which will correct this anomaly to a large extent.

Analysts expect four of these super markets to be operational by the end of financial year 2004-05. Meanwhile, the fact that Pantaloon is already an established player in this (supermarket) segment has resulted in a higher valuation for the company.

While the current price of Trent discounts FY04 earnings around 16 times, Pantaloon's valuations have risen to over 20 times one-year forward earnings.

Finolex Industries

Growth in rural water supply projects is expected to be the main demand driver for PVC pipes. In line with this expectation, Finolex Industries is hiking its capacity of PVC pipes by 30 per cent to 52,000 tonnes.

The company operates in both the PVC (polyvinyl chloride) resin as well as the PVC pipes segment, with the bulk of its revenues coming from PVC resins. Expansion in the pipes segment will give it a better positioning in the water supply and irrigation segment (agriculture sector).

Being a largely monsoon dependent sector, the requirement for efficient irrigation is considerable, especially considering that only around 35-40 per cent of total land is irrigated. Thus, the fact that there were good monsoons this year should drive demand for pipes.

Further, the Andhra Pradesh government has recently announced a Rs 1200 crore irrigation project and with more state governments following suit, it should result in a surge in demand for pipes. With a market share of around 20 per cent, Finolex will be among the major beneficiaries.

But with the company currently getting around 80 per cent of its revenues and 93 per cent of earnings (before interest and tax) from the PVC resins segment, profitability in the near-term will be driven to a very large extent by the movement in prices of PVC as well as ethylene dichloride (EDC), which is the main raw material.

The first quarter has seen a rise in prices of EDC and coupled with lower demand for PVC globally, Finolex's EBIT margins fell to 11 per cent in Q1FY04 compared to 34 per cent in Q1FY03. But prices of PVC have firmed up over the last couple of months and, as a result, the pressure on margins due to rising EDC prices will be mitigated.

The September quarter is generally a period of firm prices for the petrochemical manufacturers due to greater demand from China historically. Hence, there should be a notable improvement in profitability compared to the first quarter.

With contributions from Mobis Philipose and Sameer Ranade