Retail firms likely to face margin pressure in March quarter

Retail firms likely to face margin pressure in March quarter

The theme for retail companies’ performance in the March quarter is fairly straightforward. Revenues are expected to show good growth, while operating profit margins are likely to be under pressure, thanks to higher input costs. Having said that, analysts expect some slowdown in volume growth after record sales by most retailers in the December quarter, which was the festival season in 2010-11 (FY11).

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As far as margins are concerned, it is known that cotton prices have risen substantially and that is expected to weigh on margins, despite the fact that many apparel retailers have taken price increases to offset that pressure.

“This, along with the incremental impact of excise duty at 4.5%, which was imposed in the recent budget and became effective immediately, should restrict any margin improvement in Q4FY11 estimates, as well as in the coming quarters, as consumers adjust to the rising apparel prices with reduced spending," analysts from Prabhudas Lilladher Pvt. Ltd said in their March quarter preview.

According to the average of estimates of four brokerages, Pantaloon Retail (India) Ltd’s revenue is expected to increase by 42% on a year-on-year basis. That is expected to be driven by good same-store sales growth across lifestyle retail (including upscale goods such as apparel and accessories), the value retail business (value-for-money goods) and the home retail business that comprises home segment goods. Margins are expected to be under pressure, reckon analysts.

“We expect margins to be under pressure due to high cost of goods sold and increased focus on food business," wrote analysts from Edelweiss Securities Ltd in their March quarter preview. Also, losses in the electronics business are expected to put pressure on Pantaloon’s margins.

Like Pantaloon, Shoppers Stop Ltd, too, is expected to post strong revenue growth helped by space expansion and good growth at HyperCityRetail (India) Ltd. But HyperCity is expected to post a loss yet again. Investors are likely to keep a close watch on the performance of HyperCity.

Pantaloon’s stock has underperformed the BSE-500 Index of the Bombay Stock Exchange since the beginning of this calendar year, whereas Shoppers Stop’s scrip has more or less performed in line with it. The underperformance does make Pantaloon’s valuations attractive, but higher interest costs remain a concern for the stock.

On the other hand, Shoppers Stop has already appreciated considerably in the last fiscal, which makes its valuations look expensive.

Graphic by Paras Jain/Mint

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