Pantaloon, with its many subsidiaries, was among the major beneficiaries of the sum-of-parts valuation theory. Now that the focus has shifted to fundamentals and businesses that are already generating profit, the company’s investors would be glad to note that the core retailing business is on a strong footing. About a year ago, same-store sales were stagnant and costs were rising, as a result of which profit before tax (excluding other income) halved in the April-June 2007 quarter.

But things are markedly different this time around. For the year till June, the company’s profit before tax has jumped by 116%. Note that this is after accounting for a 126% jump in depreciation charges and a doubling of interest costs as well. Pantaloon has been able to improve its operating margins substantially as earlier investments in people and space are now paying dividends.

The numbers look extremely impressive, but analysts tracking the company say that the results were in line with expectations. Importantly, the company has met the targets on store additions, subsidiary revenues and losses, and other other such guidelines given to investors.

Also See Not Too Expensive (Graphic)

The retail space of the company increased to 7.9 million sq.ft by the end of the fiscal year, close to the indication of 8 million sq. ft. the company had given analysts. This is comforting in an environment where most other retail players have been unsuccessful in adding space consistently. Fears about the company losing revenues to new entrants like Reliance Retail Ltd also seem to have come unfounded.

Another worry the markets had was relating to the valuation of the company’s inventory. The change in the policy for valuation had been pending for some time, and Pantaloon has finally written off Rs74 crore from accumulated profit. According to analysts, the write-off too was in line with expectations.

Under the circumstances of rising real estate costs and the jump in salaries in the retailing industry, the doubling of Pantaloon’s profit on the back of a 55% rise in revenues is commendable. Its subsidiaries have reported large losses, but that too was expected because of large investments in the logistics and the home retailing businesses.

With valuations having corrected by two-thirds from the peak in January, the Pantaloon stock, for a a change, isn’t looking expensive. Based on Morgan Stanley’s estimates, it trades at 14 times FY09 earnings, after adjusting for the value of its subsidiaries.

Despite recovering on Monday, metal stocks could face the brunt

The Bombay Stock Exchange’s Metals index was one of the only two sectoral indices to gain on Monday. But it was also among the worst hit last week, falling by 7.8%. Although most stocks fell sharply last week after news that the financial crisis had worsened, there was a sharp recovery on Friday thanks to liquidity infusion by Western central banks. The broad markets, measured by the BSE-500, fell by a much lower 1.7% last week thanks to a near-5% jump in the index on Friday.

Investors were generally more cautious with metal stocks, because of fears that the financial crisis would worsen the slowdown in the global economy and as a result accelerate the drop in commodity prices. The worst-hit stocks within the metals index were National Mineral Development Corp. Ltd (NMDC), Sesa Goa Ltd and Gujarat NRE Coke Ltd. While NMDC shares fell by about 22% over the week, the other two fell by about 20%. Each of these companies produce key inputs for the steel industry—iron ore and coking coal. Prices of both these commodities had risen substantially and the fear seems to be that the move could be equally sharp on the way down. At least that’s what the share price movement of these stocks, not only in India but across the globe, suggests. A research report by Motilal Oswal Securities Ltd points out that spot iron ore prices have fallen by more than a third from their high in January to $130 (Rs5,902) a tonne. Demand for low-grade ore has completely waned, says the firm, which has a sell rating on Sesa Goa Ltd because of a resultant drop in shipments from Goa.

The impact on steel manufacturers, so far, seems neutral, with the drop in steel prices being compensated by a fall in prices of coking coal and iron ore. However, for companies such as Steel Authority of India Ltd and JSW Steel Ltd, which depend on a relatively high proportion of imported coking coal, the sharp depreciation in the rupee could have a negative impact. Meanwhile, China’s steel exports have risen by 12% on a month-on-month basis, despite a 5% drop in production. Motilal Oswal Securities Ltd’s analysts say this implies a sharp decline in demand, post the Olympics. If a similar trend with China’s steel exports continues, steel prices may come under more pressure, and so could steel stocks.

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