Pantaloon Retail’s stock has gained 6.5% in November till the announcement of its September 2012 results on Friday (post market hours) in anticipation of no negative surprises amid already low expectations.
However the stock lost 2.32% of the gains today as the company disappointed heavily on net profit front even though sales growth has come in line with expectations.
The company’s announcement of de-merging fashion business into a separate entity namely Future Fashion, transferring debt of Rs 1,226 crore and listing it later-on after issuing one share of the new entity for every three shares/DVRs in Pantaloon Retail are all positives.
Says Kishore Biyani, chief executive officer, Future Group, “We grew multiple formats in the early stages of our growth, and now as each one of them has become sizeable, we are giving them independence to propel their growth. “This consolidation will help create the base for the next phase of growth of the Future Group in modern retail.”
However, debt woes (core retail debt of roughly Rs 2,500 crore post the three deals) will continue and impact profitability. Hence, until all the dirt is cleaned, the stock may continue to remain under pressure though announcements related to company (de-leveraging attempts) or sector (FDI news) may lead to a temporary bull run.
Net profit disappoints again
The company’s net sales of Rs 3,060 crore and growth of 5.1% was not that bad considering muted consumer sentiments (read lower spend), extended end of season sale and festive season falling in December quarter.
Analysts had expected an average Rs 3,069 crore (growth of 5.4%).
Same store sales growth (SSSG) in value (3.6%) and home retail (1.3%) has come on expected lines of 1-4%. Lifestyle retail surprised with 6.5% SSSG.
With better control over costs (including reduction in staff expenses), operating profit margin has been maintained at 8.6%, which is another positive. But significant jump in interest cost (35%) led to 87% drop—higher than expected 73.5%-- in net profit (Rs 4.4 crore).
Valuation after de-merger
The company’s attempt to further simplify business structure and have three distinct listed entities namely Pantaloon Retail (hypermarket and supermarket chains), Future Fashion (fashion) and Future Ventures India (food and FMCG) will help grow the formats profitably and in turn reduce the debt burden. Analysts have given thumbs up to the move.
Says Abneesh Roy, analyst, Edelweiss Securities, “The recent development will help re-focus on core retail business (help address slow SSSG) and are enthused by the pick-up in deleveraging steps initiated by the company.” However, the process will take time and benefits will flow in only over next couple of quarters.
After selling Pantaloon retail format to Aditya Birla Nuvo and now de-merging the fashions business, the new Pantaloon (which will have Big Bazaar, Food Bazaar, Home Town, eZone besides investments in subsidiaries involved in supply chain and sourcing among others) may attract relatively lower valuation thanks to predominance of value business, which do not yield higher margin like lifestyle related products like apparel. At Rs 198, the stock currently trades at 28 times FY13 (year ended June) estimated earnings.
