Companies & Sectors
Erratic turnover and high interest cost send Pantaloon stock skidding

Pantaloon Retail is running an operation that can only be maintained by a constant injection of loans. As interest rates rise, this will play havoc with the bottom-line

Shareholders of leading retail chain Pantaloon Retail should be a worried lot. The stock has fallen by a sharp 42% over just four months—from Rs517.40 on 5 October 2010 to Rs300.90 (yesterday). If these shareholders look a little bit closer, they will wonder for whom the company is being run—the shareholders or the bankers?

Research analysts tracking retail stocks say that the current high interest rate regime is the key reason for the underperformance of the stock, even as the company is planning an expansion & restructuring exercise. But is there a problem with the business model itself? Pantaloon’s turnover is erratic and it is essentially pushing sales with borrowed money.

The company’s net sales declined over the past two quarters, despite its increasing footprint and the country’s strong economic growth.

Pantaloon Retail’s net sales came down to Rs991.49 crore in the September 2010 quarter from Rs1,642.41 crore in the June quarter.

Again, profit margins have not been healthy. A large part of the company’s operating profit has been eaten up by interest cost. Consider this. The operating profit of the company was Rs78.27 crore in the June 2010 quarter. In the same quarter, the interest cost was Rs81.20 crore—more than the operating profit.

This may have been an aberration. But even in the next (September) quarter, the operating profit was Rs93.74 crore—but the interest cost was Rs41.98 crore—almost half the profit. At the cost of repetition, one must add... Shareholders should really wonder, is the company being run only for bankers?

Analysts tracking the stock say that the planned expansion & restructuring exercise is mainly through loans, which will inflict a heavy interest burden on the company in the future. Again, given the current galloping inflation rates, sales are not picking up. Hence the margins are coming under severe pressure.

Sangeeta Tripathi, senior research analyst, ShareKhan, told Moneylife: “From the fundamental perspective the company is doing well, though the stock has been hammered for no particular reason. The only issue with the company is the debt levels which are very high. There would be some part of repayment as soon as next year. The results for the December quarter would be crucial. There might be good valuations coming in from the next quarter. Overall we remain positive on the stock.”

Another research analyst says, “The company is just (coming) out of the festive (sales) season. Going forward, sales might pick up in the coming discount season expected in the month of January–February.”


Wednesday’s Market Preview: Positive opening indicated

The domestic market is expected to witness a gap-up opening on positive cues from the global arena. The US markets, which opened after an extended weekend, reported modest gains on strong earnings reports and signs easing of the debt situation in Europe. The Asian pack was mostly in the green in early trade on Wednesday, boosted by US corporates. The SGX Nifty was down 18 points at 5,720 over its previous close of 5,738.

The market witnessed a gap-up opening on Tuesday on better-than-expected third quarter earnings reports from blue-chips. Renewed buying interest from institutional investors also supported the upmove. The indices picked up momentum in morning trade and the Sensex regained the 19,000-mark and the Nifty crossed the 5,700 level. The gauges were range-bound in subsequent trade. The market remained listless post-noon, but a sudden bout of institutional buying in the last half-hour lifted the key indices to the day's highs and ensured a close near those levels. The Sensex closed 210 points higher at 19,092 while the Nifty gained 69 points and settled at 5,724.

Wall Street, which opened after an extended weekend, closed with modest gains on positive earnings reports and signs of easing of the debt crisis in Europe. Apple’s CEO Steve Jobs’ medical leave weakened the stock in regular trading, however, the stock gained in after-hours trading on the back of better-than-expected revenues. Other companies like Google and Caterpillar also gained, anticipating good earnings.

In economic news, the Federal Reserve Bank of New York survey of regional manufacturing activity showed improvement in January, coming in just below economists’ forecasts. But traders noted an improvement in the key new-orders index.

The Dow gained 50.55 points (0.43%) to settle at 11,837.93. The S&P 500 added 1.78 points (0.14%) to 1,295.02 and the Nasdaq rose 10.55 points (0.38%) at 2,765.85.

Earnings optimism in the US also supported markets in Asia in early trade today with most of them trading higher. Speculations that Chinese inflation numbers, due on Thursday, will not hinder growth also gave some relief.

The Hang Seng rose 0.61%, the Nikkei 225 was up 0.15%, the Straits Times added 0.01%, the Seoul Composite gained 0.45% and the Taiwan Weighted was up 0.14%. On the other hand, the Shanghai Composite was down 0.11% and the KLSE Composite lost 0.29%.

Implementation of the much-awaited mobile number portability (MNP) from Thursday will hit the operating margins of service providers while those with deeper pockets would be better placed to cope up (with the new scenario), ratings agency ICRA noted.

The nationwide implementation will increase churn of customers, shoot up the customer acquisition and retention costs, and lower the ARPUs (average revenue per user) as competitive tariff plans will have to be offered, the agency said..


Further rate hike to impact industrial growth: Commerce ministry

New Delhi: A week ahead of the Reserve Bank of India (RBI) reviewing the monetary policy with expectations of a policy rate hike, commerce and industry minister Anand Sharma has cautioned that raising cost of borrowing “may not be suitable” tool to rein in inflation, reports PTI.

Making out a strong case for easy finance to the industrial sector, in a letter to finance minister Pranab Mukherjee, Mr Sharma said that industrial growth has already plunged to an 18-month low of 2.7% in November 2010.

“The high inflation in primary articles, particularly vegetables, is more on account of supply side constraints and monetary policy may not be the most suitable intervention to deal with the situation,” he said.

While he appreciated concerns on inflation, the minister said, “Industrial sector clearly needs sustained support to enable complete recovery.”

The RBI is scheduled to announce its quarterly policy review on 25th January. There are wide anticipations that the central bank in its third quarter monetary policy review will raise the key policy rates by at least 25 basis points in the wake of soaring inflation.

High food inflation has been a major concern for the government. Rising food prices have pushed up inflation to 8.43% in December last year.

Food inflation stood at a high level of 16.91% in the first week of January, after touching 18.32% in the last week of December 2010.

“A selective restriction on credit may be necessary to check inflationary pressures, but the imperative of easy credit flow for industrial sector, especially the infrastructure and manufacturing is crucial for the economy,” the minister added.

The minister said that the capacity addition has not been at an appropriate level to ensure the sustained targeted growth in gross domestic product (GDP).

The government is expecting that the country’s economy would grow by 8.75% in the current fiscal.

“... Capacity addition has been much below the 11th Plan targets in power, roads and other infrastructure sectors,” he added.

RBI has raised short-term rates six times last year to check inflation.


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