BackThe risk in retail biz
The risk in retail biz
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The slowdown in the economy will lead to lower consumer spending on the one hand, while on the other, retailers’ plans to expand capacity are also hit owing to funding woes.
Already, higher funding costs are eroding earnings. Pantaloon Retail (India) Ltd, the country’s largest organized retailer, had managed to grow profit before tax by as much as 112% to Rs196 crore during the last fiscal year ended June. But in the quarter ended September, profit before tax rose by just 21% to Rs55.75 crore, even though operating profit rose by 62% to Rs155 crore. This was primarily owing to a 94.5% jump in interest cost.
Pantaloon has had an interest cover (Ebit/interest) of more than two times for the past two years. In the September quarter, it slipped to 1.82 times. Internal accruals are clearly not sufficient to fund the opening of new stores, and the company has traditionally issued a mix of equity and debt to fund expansion. The equity route is all but closed, which means companies such as Pantaloon would have to take on more debt to fund expansion. Recently, another retail major, Shoppers Stop Ltd, decided to reduce the size of its rights issue.
Retailers thus face the uncomfortable choice of either borrowing more or slowing expansion. While higher leveraging will increase risk considerably from current levels, especially given high interest rates, slower expansion would make growth prospects unexciting.
Much of the growth in the past has come from new stores and the economies of scale of running a large operation. Same-store sales has been muted for some time now—between April and September, Pantaloon’s same-store sales have grown by 10.7% in the value-retailing segment and by 8.9% in the lifestyle-retailing segment.
These concerns seem to be reflected in share prices of retail companies, which are down about 70% from their peak early this year.
Write to us at marktomarket@livemint.com
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