Efforts to improve cost efficiencies has reflected in better margins, which along with planned expansions should help Pantaloon sustain robust growth rates.
For the retail sector, which had a harrowing time not until long ago with consumer’s curtailing their spending, things seem to be stabilising. Last week’s results of India’s largest organised retailer, Pantaloon Retail, is some evidence and which also indicates that the company’s strategy of focussing on profitable growth (rather than merely topline growth) is paying-off well. With the worst in consumer spending behind, as fears of job-losses and pay-cuts subside, it has again resurrected the prospects of urban-focussed players like Pantaloon. Consolidation of its existing business, addition of new stores and enhanced focus on cost savings, should drive future growth. The company’s plans to raise money through the equity route and improve supply chain and inventory management should help it repay debt and fund expansion plans as well.
Better record
The under-penetrated nature of the organised retail space has been offering opportunities for many. However, Pantaloon has embarked quite early to take a larger slice of the market with the company adding retail space faster than the industry average, doubling its total retail space in the last three years to 13 million square feet (msf) at the end of 2008-09. This explains why the company was able to double its sales in the same period. The company might be present across 73 cities and 66 rural locations, but the top eight cities contribute around 60 per cent of its revenues.
| STRONG RETAILING | ||||
| in Rs crore | FY08 | FY09 | FY10E | FY11E |
| Net sales | 5,049 | 6,342 | 8,456 | 10,860 |
| EBITDA | 461 | 668 | 894 | 1,148 |
| EBITDA margins (%) | 9.1 | 10.5 | 10.6 | 10.6 |
| Net profit | 126 | 141 | 237 | 338 |
| EPS (Rs) | 7.9 | 7.4 | 12.5 | 17.7 |
| P/E (x) | 42.0 | 44.9 | 26.6 | 18.7 |
| E: Analysts estimates; year ending is June | ||||
This strategy is working well as the top cities churn higher revenues for organised retail. As per Crisil, the top 8 cities that include the four metros and Hyderabad, Bangalore, Pune, Ahmedabad, account for 75 per cent of the total organised retail market for the top 34 cities in India.
Diversity pays off
The company is present across lifestyle, value and home segments through format stores like Central, Pantaloons and Big Bazaar among others. The company’s peers might have felt the impact of the slump over the last few quarters; however, Pantaloon was able to weather it off better because of its varied presence across retail categories. For instance, Pantaloon earns as much as 70 per cent revenues from value retailing that consists of a good mix of non-discretionary items like food, which saw lower curbs on spending, compared to lifestyle segment. For a retail player, its performance is judged from the growth derived from the existing stores, popularly called same store sales (SSS). Pantaloon was able to maintain double-digit SSS in its value and lifestyle formats for most part of the calendar year 2008, barring the exceptional months of November and December when the loss of consumer confidence affected sales across the industry. Nevertheless, the growth in its SSS numbers soon started looking up and stood at 8 per cent for June 2009 quarter.
For now and as consumer confidence is gaining ground, even as Pantaloon continues to feel the pains of the economic slowdown in its home-retailing format (accounts for less than 10 per cent of revenues), its other major formats continue to grow at healthy rates (see Chart). The management feels that SSS would grow in double-digits for the rest of the year as shoppers are increasingly coming back to malls with better ticket sizes.
Profitable growth
With an observable down-trading in consumer tastes in the first half of CY 2009, the company introduced higher discounting and a focus on value-retailing to spur growth. These measures might have delivered better volumes in trying times; nevertheless, they came at the cost of margins. For instance, value retail format like Big Bazaar would typically deliver 25 per cent gross margins, compared to 45 per cent offered by lifestyle stores.
To boost margins, the company started work on leaner cost structures through employee productivity measures and operating costs cut-backs. Real Estate analysts suggest that retail rents have corrected by 25-30 per cent across markets from the peak levels, suggesting lower rentals for new retail space as well as existing (led by renewal and renegotiations). In cognisance, EBITDA margins started improving and touched a high of 11 per cent in the fourth quarter of 2008-09. Further, plans are afoot to increase the proportion of private labels, which offer better profits over branded players, from around 15-20 per cent. These moves could also support margins in the future. Likewise, it aims to drive efficiencies, including improving its supply chain and inventory management, through increased use of technology. Analysts believe that steps like store rightsizing and inventory management alone should help result in cash profit generation of about Rs 700-800 crore in two years, which could help part-fund its expansion plans. For 2009-10 and 2010-11, they expect EBITDA margins to hover around 10.50-11 per cent.
Conclusion
Rising disposable income and encouraging demographics would ensure that under-penetrated organised retail market would see good days ahead. As per estimates, by 2015, the organised market could expand at 14-18 per cent vis-a-vis 3-4 per cent industry growth. For Pantaloon, it expects revenue growth to average at 25 per cent (annually) over the next 3-5 years helped by the company’s plans to expand its total retail space to 25 msf by 2013-14, including into second-tier cities. While focus on cost efficiencies and other measures should ensure that profits grow faster. The company also plans to raise Rs 1,000-1,200 crore through various instruments; it has already raised funds worth Rs 300 crore through issue of equity to promoters and others. This along improved cash generation should help funds its expansion plans as well as repay debt. Lastly, its move to restructure its businesses into separate entities should help unlock value in the long run. At Rs 331.4, the stock is trading at 18.7 times its 2010-11 earnings and could deliver 15-20 per cent in a year’s time.
