Pantaloon Retail: Perfect stitch

Growth is more than adequately priced into the stock

Pantaloon Retail's stock price has risen at a compounded average rate of 195 per cent in the four years between June 2001 and June 2005.

But the scorching pace at which the stock has moved in the past seems to have no impact on its current performance. In less than two months, that is, since June 2005, the stock has already risen about 27 per cent. It now trades at Rs 1,744, almost 10,000 per cent more than its price in June 2001. Also, the company is now valued at very high 44 times estimated EBITDA for the year ended June 2005. 
 
The reason the excitement in the stock has continued unabated is the high growth at which the company's revenues have grown. The company announced a 103 per cent jump in July sales on Thursday, which led to a 6 per cent jump in the stock.

But investors need to note that the stock's strong run in the past more than adequately prices in such high growth rates. With the pace at which Pantaloon is adding new stores, sales growth had better be at high levels. Much of the growth in July sales came from new stores added in the past year - same store sales grew just 22.2 per cent.

But what's most important is that the company's operating profit has risen at a compounded average rate of 60 per cent in the past four years. The stock, in contrast, has risen at an average rate of 195 per cent. Also, the high capex involved in the business has resulted in negative free cash flow for the four years between FY01 and FY04. In FY04, free cash flow was negative to the tune of 10 per cent of sales.

Although the outlook for revenue growth remains bright, it's highly unlikely that profit growth would pick up from current levels. This is because the share of the lower-margin 'value retailing' business is growing at a much faster pace compared with the 'life style retailing' business.

Analysts point out that within the value retailing business, the share of low-margin food business is growing at a faster pace. The markets, however, seem to have priced in an increase in margins going forward. With Pantaloon Retail trading at over 100 times its trailing earnings and 40 times its estimated FY07 EPS, it would be an understatement to say investors are over-excited about India's retail story.

Dr Reddy's new strategies

Dr Reddy's Laboratories had managed to return to the black in the June quarter after several quarters of lacklustre performance. The company's improved performance is being attributed to its strategy of diversifying its export base beyond the difficult North American market coupled with a tight check on operating costs such as R&D.

The company's surging selling expenses over the last few quarters to expand its presence in emerging markets such as eastern Europe and CIS countries, has shown signs of paying off in the June quarter.

For instance, in the branded formulations business, the company's revenues in Russia expanded 47 per cent on a y-o-y basis in Q1 FY06 and in Romania and Albania, it grew by 89 per cent. In addition, in the generics business, the company's strategy of focusing on product segments where demand actually exceeds supply in Europe, has helped it to get better realisations and also expand the size of this business.

On the cost side, the benefits from its recently concluded agreement with ICICI Venture for funding its R&D are also clearly noticeable "" the R&D cost has fallen about 21.4 per cent in the June quarter. Also, returns from its investments in the biotechnology business are also more visible now ""- the company was able to expand the critical care and biotechnology business by 62 per cent on a y-o-y basis in the last quarter. Going forward, the management's ability to continually stay ahead of other generic players via innovative strategy is being regarded as key.

Growth funds

The markets may be scaling new highs every day, but if inflows into growth funds are any guide, the mutual fund investor has been conspicuous by his absence. Data from the Association of Mutual Funds, shown in the table, indicates that sales of growth funds have been only marginally higher than redemptions in the last couple of months.

ODD NUMBERS
(Rs cr)
Month	Total sales	Sales under
		new schemes	redemptions
July 05	4,333	838	3,599
June	4,512	857	4,463
May	6,008	4,136	2,971
April	4,161	739	1,266
Mar	8,828	7,016	5,133
Feb	3,180	958	3,406
Jan 05	2,956	193	1,862

This year, net sales of growth funds have been as follows: January""-Rs 1094 crore; February""negative Rs 226 crore; March""-Rs 3695 crore; April""-Rs 2895 crore; May""-Rs 3037 crore; June""-Rs 49 crore and July""-Rs 734 crore.

Net inflows were much higher in March, April and May, but then new schemes mopped up a lot of money in these months, so there was probably a lot of churn by investors selling units in their old schemes and investing in new schemes. If the contribution of new schemes is ignored, net inflows into growth schemes have been very poor indeed.

With contributions from Mobis Philipose and Amriteshwar Mathur