Pantaloon: Perfect fit

Pantaloon's margins should expand as the ratio of store brands increases and supply chain efficiencies improve.

Pantaloon Retail has disappointed the street with its FY06 numbers, which saw revenues growing by 74 per cent to Rs 1,868 crore and operating profit rising 64 per cent y-o-y at Rs 142 crore.

Operating profit margin was lower by about 50 basis points at 7.6 per cent. In fact, the OPM for the June quarter was up just 20 basis points y-o-y at 6.5 per cent, despite a 61 per cent growth in revenues y-o-y and 27 per cent q-o-q, largely because the company has been investing in infrastructure and people.

Also, the gross profit margin has not grown 160 basis points y-o-y as it appears, and adjusting for the changed manner of reporting sales tax, it is flat at 33.4 per cent.

However, the gross profit is up 68 per cent y-o-y and 3 per cent q-o-q, which is creditable given that the lower margin value retailing has grown faster""now accounting for 71 per cent of sales""than the higher margin value retailing.

Margins for value retailing have improved, while those for lifestyle retailing have fallen. Inventories were higher by 117 per cent in Q4 FY06 given that nearly half the space added during the year happened in the last quarter. The total space under coverage now stands at an estimated 2.75 million sq ft.

Pantaloon leads the industry in terms of the number of stores it has set up especially in the hypermarket segment where it has over 20 Big Bazaars compared with one for Trent and one, as of now, for Shoppers' Stop.

However, margins are typically lower in this segment and niche players focusing on single verticals are making their presence felt.

Moreover, competition is high in the lifestyle segment with a whole host of players setting up shop. including foreign brands. Margins should expand as the ratio of store brands increases and supply chain efficiencies improve.

While the stock is probably the best play on the burgeoning retail sector, given its blistering pace of growth, at the current rate of Rs 1846, it trades at 45 times estimated earnings for FY07 and 28 times FY08 earnings and is undoubtedly expensive.

Wockhardt: European thrust

Wockhardt made its fourth acquisition in Europe via Ireland-based Pinewood Laboratories for $150 million or about Rs 685 crore.

The company has been actively scouting for foreign buys and incurred a due diligence expense of Rs 22.8 crore for an acquisition in the US that didn't fructify in the March 2006 quarter.

Pinewood had sales of over $70 million for the year ended June 2006, implying an enterprise value to trailing sales of about 2.14 times, which is in line with what other players have paid in recent times.

Prior to the latest acquisition, the European market has been very important to Wockhardt.

For instance, in the June 2006 quarter, Wockhardt's European sales amounted to 40 per cent of its consolidated sales of Rs 412.6 crore and the latest acquisition was expected to enhance this proportion significantly in the medium term.

Clearly, the Wockhardt management would also be focused on deriving greater operational synergies between Pinewood and its three earlier European acquisitions, Wallis Laboratory, CP Pharmaceuticals and esparma.

The Wockhardt stock trades at 18 times estimated CY06 earnings, without considering the impact of its latest acquisition.

Megasoft-VisualSoft: High and dry

It has been a roller-coaster ride for VisualSoft shareholders. From Rs 170 in October 2005, the stock price had gone up to Rs 262 in December as the company announced that it would merge AppLabs Technologies and eSolutions with itself. But the merger was called off in March 2006, and since then the stock has nearly halved.

Softbank and two other investors had bought shares in VisualSoft last year from some existing investors, and the three-way merger was part of their strategy.

However, the merger fell through. On the other hand, VisualSoft's financial performance, which was far from impressive, deteriorated further.

In the June 2006 quarter, its revenues declined almost 70 per cent y-o-y to Rs 15.94 crore. Net profit fell from Rs 5.98 crore in June 2005 to Rs 26 lakh in June 2006. Even in FY06, revenues had dipped 15 per cent to Rs 160 crore with Q4 revenues nearly halving.

So, the merger with Megasoft will be good for VisualSoft investors, and though, Megasoft's revenues were lower at Rs 115.43 crore in CY05, its net profit margin of 17.5 per cent gives it a better valuation.

Megasoft expects to gain ready infrastructure and trained manpower in its focus area of telecom, and expand its solutions offering.

Though the swap ratio has not been finalised, it is likely to be around five shares of Megasoft for eight shares of VisualSoft. The deal values VisualSoft at about 1.4 times trailing 12-month sales against Megasoft's 3.1 times trailing 12-month sales. After this announcement, the VisualSoft stock is up about 5 per cent, while Megasoft is mostly unchanged.

With contributions from Amriteshwar Mathur and Shobhana Subramanian