Pantaloon Retail (India) Ltd’s March quarter performance reflects the effect of better economic conditions on consumer spending. But the retailer’s net profit came in lower than estimates despite sales growth meeting expectations. Higher material costs are one possible reason for that variance. Along with its results, Pantaloon Retail also announced the next leg of its restructuring exercise. So far, its value retail business has been transferred to a subsidiary and parts of its home retail business (housed under a separate subsidiary) are proposed to be merged with Pantaloon Retail.
Now, it proposes to demerge its mall management business and project management business to a subsidiary. This subsidiary will float another one, to which Pantaloon Retail will spin off its mall asset management business and food service business. The main subsidiary will issue shares to Pantaloon Retail shareholders, in the ratio of one for every 20 shares held. Typically, a spin-off in this form will see the new subsidiary being listed, unlocking value for shareholders. There is still more restructuring to come, as the company had diversified into many lines of business, some unrelated, such as financial services.
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Pantaloon Retail stand-alone net sales have risen 25.3% to Rs2,057 crore during the quarter, as same store sales plus new store additions contributed to higher growth. But its material costs rose 27%, which were offset by lower increases in other heads of expense, preventing a decline in operating profit margins, which ended flat. The increase in material costs may be explained by inventory movements too. While inventory had declined by Rs0.4 crore in the March quarter, it had increased by Rs58 crore in the year-ago quarter. Since this increase is reduced from material costs, it has had the effect of creating a low base effect. Pantaloon Retail’s net profit rose 62% against consensus estimates of 70%. In the March quarter, its value and lifestyle retail formats reported a smart rise in same store sales growth.
Pantaloon Retail added around 0.6 million sq. ft of retail space during this quarter. To meet its full-year target, it will need to add about 1 million sq. ft of retail space in the last quarter. The outlook for Pantaloon Retail appears bright, as all its formats are seeing good growth in sales. As retailers get more confident about their business prospects, new store openings will gather pace, adding to sales and profit growth. One risk is the impact of service tax on lease rentals on their margins, which will reflect in the coming quarters.
In the near to medium term, however, Pantaloon Retail’s share price will be influenced by the final shape of its restructuring process.
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