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Raw material costs pose balance sheet concerns for Pantaloon

Raw material costs pose balance sheet concerns for Pantaloon
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First Published: Sun, Aug 28 2011. 09 58 PM IST
Updated: Sun, Aug 28 2011. 09 58 PM IST
Pantaloon Retail (India) Ltd is feeling the impact of increase in raw material prices, additional excise duty and inflation. In the June quarter (which is the fourth quarter for the company), core retail revenue increased by 14.7% over the same period last year.
While the growth looks robust, it was actually below many analysts’ estimates. Same-store-sales (SSS) growth, which indicates the sales performance of stores that have been in the business for at least a year, has been weak.
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SSS growth in Pantaloon’s lifestyle retail segment (which consists of upscale goods such as apparel and accessory) and value retailing business (including value-for-money goods) stood at 11.4% and 7.5%, respectively. Growth in the lifestyle segment was higher than the growth in the March quarter while that’s not been the case for value retailing.
The key disappointment came from the home retailing business, where there has been a 4.5% de-growth in SSS. For comparison, SSS growth in the home retailing business in the March quarter stood at 9.1%.
Analysts maintain that the inflationary environment has negatively affected volume offtake across segments. It won’t be surprising if the same trend continues in the near future as well. The good thing is Pantaloon has managed to improve its operating profit margin by 60 basis points to 9.1%. One basis point is one-hundredth of a percentage point.
The Street was broadly expecting operating margins to remain flat or decline slightly on account of cost inflation.
Meanwhile, Pantaloon’s balance sheet has changed for the worse. The company’s consolidated loan funds have increased by a huge 80% in FY11 to Rs 7,850 crore. Pantaloon’s interest coverage ratio though, has improved slightly to 1.46 times in FY11 from 1.37 times in FY10.
Another key negative is the deterioration in inventory management.
“The company continued to struggle with inventory management as inventory on the consolidated books rose from Rs 24.9 billion in FY10 to Rs 36.8 billion in FY11. The inventory days also increased from 93 in FY10 to 110 in FY11,” wrote analysts from Ambit Capital Pvt. Ltd in their post results note last week. One reason for that could be the higher apparel prices.
These balance sheet issues, coupled with slowing consumer demand, are likely to keep sentiments muted for the stock in the days to come. One breather for the company is in the form of softening raw material costs, although the company maintains that there is a lag effect of seven months from sourcing yarn for fabric to production and retail sale.
The company will now have to wait for some respite as and when consumers get used to higher prices of apparel.
Graphic by Sandeep Bhatnagar/Mint
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First Published: Sun, Aug 28 2011. 09 58 PM IST