Companies & Sectors
Pantaloon’s growth is expected to come under pressure due to massive debt

Pantaloon has achieved phenomenal sales growth over the past few years. The expansion has been driven by massive debt financing. Now the interest and repayment burden could restrict further growth

Over the past few years, Pantaloon Retail, the country's largest retail chain by sales, has recorded impressive sales growth, far outperforming its peers like Shoppers Stop and Trent. Unlike these smaller players, Pantaloon has aggressively resorted to debt financing to fund its robust expansion across the country.

The increase in bank borrowings over the past few years has helped Pantaloon achieve a growth rate that is more than twice that of its closest rivals. Since 2007, Pantaloon has recorded compounded annualised sales growth of 41%.

Comparatively, the sales growth of Shoppers Stop and Trent has been lower at 15% and 16%, respectively. On the other hand, Pantaloon's debt has increased at a CAGR (compounded annualised growth rate) of 53% during this period compared to Shoppers Stop and Trent whose debt has increased at a much lower rate of 18% and 4%, respectively.

To get a better picture of the extent to which Pantaloon has used debt to spruce up revenues, we compared the annual borrowings to sales for each of the companies. Pantaloon's debt level averaged a massive 44% of its sales for the past four years. In comparison, Shoppers Stop averaged a debt level of 16%, while Trent's debt accounts for 28% of its sales, averaged over the period. Pantaloon has a debt exposure of nearly Rs4,000 crore on its books as of March 2010 while Shoppers Stop and Trent have manageable debt of Rs252 crore and Rs264 crore, respectively.

What is a bit of a bother for Pantaloon is the meagre cash flows. Due to this limitation on cash, not only would growth be restricted, but the company may have to resort to additional debt or equity dilution to meet the rising costs of financing and repayment obligations. The company burnt cash to the tune of Rs2,400 crore and Rs1,100 crore in fiscal 2008 and 2009. In the fiscal year 2011, Pantaloon has a debt repayment obligation of over Rs2,500 crore, while the total cash outgo is expected to touch Rs7,500 crore.

"Unless cash generation from operations (before capex and interest payment), which was quite low during the last two years, improves, the company would need to borrow additional debt or raise equity to meets its interest and loan repayment obligations," BRICS Securities said.

BRICS Securities believes that the interest and repayment burden would severely restrict Pantaloon's growth prospects over the next five years. "Pantaloon's significant increase in debt could put company's growth off track. Rising rates and lower credit rating (would) make further debt funding both expensive and risky. Raising equity is EPS dilutive, restricting the quantum of funds from this route. Trent, Shoppers Stop and to a large extent Raymond, will not face this issue as their debt levels are manageable," the BRICS report said.

The BRICS report also pointed out that efforts by the company's majority owners to raise debt were further cause for concern. The report highlighted that in March 2010 one of the shareholders of Pantaloon, Pantaloon Industries, had raised long-term loans of Rs2,500 crore, which was assigned an MAAA- rating by credit rating agency ICRA. That's just one level about junk status. Another major shareholder, Future Corporate Resources, with debt outstanding amounting to Rs6,100 crore, had approached IL&FS to raise Rs2,500 crore through issuing 11.4% NCDs maturing in 2013. Already, the promoters have pledged 18.9% of their holdings in the company as security for debt facilities.

Given the tightening liquidity environment, the Future Group is likely to face pressure in servicing its Rs5,000 crore debt. As far as Pantaloon is concerned, its debt service coverage ratio stands at 0.7, which is quite low compared to its peers. Shoppers Stop and Trent have a healthier repayment ability, with a coverage of 4.5 and 2.6, respectively. 

About the outlook for the company, BRICS Securities said, "Pantaloon may see growth pangs as it stares at Rs38.5 billion of debt that has been the primary driver of its growth (sales) so far. In the last three years, Pantaloon recorded sales growth of 58%, more than double the growth rates of peers, but this came with substantial increase in debt which posted 76% CAGR in case of Pantaloon against 19% for Shoppers, 9% for Raymond and 7% for Trent. The Future Group has over Rs50 billion in debt that needs to be serviced, that too in a liquidity environment which has tightened in the last three months and is expected to remain tight in the coming quarters."



MR Borkar

7 years ago

Bricks report para 3 - is the word "above" instead of 'about'? It wud have been better if 'debt to N.P' was also used. In the immediate short n med term hardening of interest rates wud make , I think a bit difficult to raise the debt as well as costly affair. We will wait for 3rd q. results before taking decision. Borkar

Gujarat NRE Mineral to file draft IPO prospectus this month

New Delhi: Gujarat NRE Mineral Resources Ltd (GNMRL), the holding company of Gujarat NRE Coke Ltd (GNCL), will file a draft prospectus for an initial share sale offer later this month, which could help it raise up to Rs1,000 crore, reports PTI.

"We will be filing the draft red herring prospectus with the Securities and Exchange Board of India (SEBI) within this month, that is October," Gujarat NRE Coke CMD Arun Kumar Jagatramka told PTI.

While Mr Jagatramka refused to comment on the amount his company aims to raise through the public float, market sources said that the company aims to garner up to Rs1,000 crore from the initial public offering.

GNCL is the flagship entity of the Gujarat NRE group and is a leading producer of met coke in the country. GNMRL holds a controlling stake in GNCL.

The company has roped in merchant banker Anand Rathi to manage the public issue, he said.

According to Mr Jagatramka, the initial public offer (IPO) proceedings would be used to hike the promoters' stake in Gujarat NRE Coke Ltd.

"The money raised by the firm will be pooled in Gujarat NRE Coke," he said.

The issue would see a dilution of 25% stake by the promoters in GNMRL. The promoters hold a 90% in GNMRL and post-IPO, it will come down to 65%.

Gujarat NRE Coke is listed on the Indian bourses.


Do Indian regulators need a hearing aid?-III

Even as the Sensex scales a 32-month high, thousands of crores are flowing out of equity funds while data from the NSE proves that the Indian equity market is extremely hollow. But regulators are in an ivory tower. In this third and final part of a three-part series, we examine the track record of various portfolio management services

In theory, PMS (portfolio management services) is the ideal solution for affluent people who are willing to pay a good fee to have their money invested in the market by experts. Supposedly smart investors have apparently put Rs30,000 crore in PMS, but returns are another matter altogether.

PMS is offered by asset management companies (AMCs), brokerage firms and niche portfolio managers.

 Of these, AMCs are the worst and attract maximum complaints. But, even here, the field is skewed by the large number of complaints about significant losses incurred by investors in Kotak group's three PMS schemes. Several investors say they have lost as much as 30% to 40% of their principal - a complaint to SEBI has often helped in getting a refund of at least the fees collected by Kotak, despite massive losses.

There are plenty of horror stories about PMS, involving the biggest names in the business. The former chairman of one of India's largest multinationals, who sits on several national and international boards and audit committees, recently told us that "In the five years I am with them, I have earned nothing while the portfolio manager continued to charge me a fee." Kotak executives are now working hard to appease him and have offered to waive their fees. But five years with no returns for a financial expert?

In another case involving the Kotak group which Moneylife has reviewed, someone had invested Rs52 lakh in two Kotak Securities portfolios in January 2007, as on 31st March, the investor had suffered a loss of approximately Rs15 lakh, or 30% of his total investment. In the same period, the benchmark indices, the BSE Mid-cap and BSE 200, were up by 15% and 30%, respectively. At times, the difference between the movement in the broader market and returns earned by PMS was startling. From April 2009 to December of the same year, while the benchmark shot up by 127%, Kotak's Smart Investor Portfolio scheme rose by only 37% - a staggering difference of 90%.

 The SIGMA Equity Portfolio did even worse. From April to December of 2009, the benchmark, the BSE 200, posted 91.2% returns, but the scheme inched up by only 8.7%.

Kotak is among the biggest in the PMS business, managing almost Rs1,000 crore. But it probably attracts the maximum number of complaints. A cardiologist couple, who had invested Rs42 lakh in a PMS with JM Financial in 2007, walked out in early 2009 with half the sum. The karta of an HUF (Hindu Undivided Family) tells us that he invested Rs50 lakh of the family fund and received just Rs31 lakh on redemption - a loss of around Rs19 lakh or 38%. A businessman said he has invested in "several different PMS and lost money in all of them." There seemed to be more bad news than good. In each case, the portfolio manager blamed the investor for the losses, or shrugged them off with the attitude that 'losses happen'. Yet, many PMS were sold on the claim that they would make profits even in a falling market (post-2008) and it is bad times that would "separate the men from the boys."

But all that PMS seemed to do was to separate investors from their money. These investors put money into PMS through hearsay. Could they have done otherwise?

Poor Information

Regulators often advise investors to think, research and then invest. Not many people know that there are three types of portfolio managers, but even if they knew this, what kind of research could they have done when there is no comparative data available? As Moneylife has highlighted for a while now, there is no statutory filing and aggregation of data in the public domain to help investors choose a PMS, based on track record.

However, before handing over money to the investment house, you can ask them to produce three years of performance. The regulation mandates that.

Since the regulator does not mandate frequent, comprehensive and public disclosures, Moneylife decided to poll its readers for some answers. For this survey, we received 122 responses to a fairly simple set of questions. Of these, we have eliminated those who have never invested in a PMS but still chose to respond to the questionnaire. That whittled the sample down to 73. This is a high-quality sample and more reliable than most surveys conducted by leading market research companies for a narrow set of people.The responses were interesting.

For starters, inducement to invest in PMS comes from a variety of sources - financial advisors (a high figure of 32%), friends (26%), brokers (21%) and bankers (18%). As we had guessed, these services have more dissatisfied investors (59%) than happy ones; a majority (63%) say they will not recommend PMS as an investment route to others. But 59% of them did get some returns on their investment - although the high dissatisfaction level suggests that the returns were probably below their expectations. In fact, 30% of the respondents received a return of less than 10%, which is below the inflation level. Of these, 20% got under 8%, which is what a bank fixed deposit would have fetched. Some 41% said their returns were over 10%. And we were not even asking how many of them beat the popular benchmarks like the Sensex. A majority of the respondents (63%) have invested in more than one PMS. Nearly half the investors (48%) have remained invested for over two years. About 12% did not respond to this query.

The survey showed that there is low awareness about costs, charges, churning of portfolios or related-party transactions. This was evident from the number of investors who simply could not respond to questions on these issues. For instance, 29% of the people did not respond to the question of returns earned, but a high 60% felt that the losses in their portfolio were due to bad stock selection. A third of the respondents couldn't say if their portfolio was churned excessively.

Only 3% of our respondents had filed a complaint with the regulator about the manner in which a PMS was run. This number is hard to analyse because it is unclear if they did not complain because they thought it was pointless, or just chose to vote with their feet. The findings suggest that all is not lost for the industry and, if the regulator puts in place a robust reporting system and some much-needed checks and balances, there would be plenty of takers for well-managed portfolio management schemes.

Snake Oil Sales Pitch

The common complaint against the performance of these schemes is that they raked up losses and churned portfolios aggressively; the stock selection was poor and some did not return even the entire principal. How are investors lured to get into PMS? Is there mis-selling involved? If so, when will the market regulator wake up and review the PMS sales literature?

What lures most investors mainly is unbridled and unregulated boastful and, sometimes, false claims. If JM Financial's executives told a doctor that the money-management skills would 'separate the men from the boys' in a downturn, a portfolio manager boasted about the firm's ability to predict trends and to hedge against risk. Another investor writes that he attended a fancy presentation by a brokerage firm which claimed 95% accuracy in stock selection. He says, "I find it difficult to digest the claim, unless you have inside information. And you cannot have inside information on all the stocks."

Apparently, these exclusive meetings at five-star venues are selling not only PMS, but also investment in poorly regulated sectors such as real estate. The sales literature of Kotak runs as follows: "Portfolio Management from Kotak Securities comes as an answer for those who would like to grow exponentially on the crest of the stock market, with the backing of an expert." The only exponential growth seems to be in the losses that they have made. Kotak claims that "to understand the dynamics of various asset classes and investment options we use the best talent in the industry to come up with cutting-edge products." This looks like pure snake oil. Investors will find it hard to understand how the 'best talent in the industry' could make absurd judgement calls to lose a large chunk of capital in 2009-2010, a period that has been hugely rewarding for investors.

In its sales brochure, Kotak states that its portfolio managers have an average experience of over nine years in the equity markets and it boasts of a research team with an average experience of five years. With such talent and experience, the Kotak team seems to be following two simple rules that take retail investors to ruin; One, 'buy high and sell low', and two, 'chase market momentum too late'.

No wonder, some sensible distributors don't sell PMS. Last year, Brijesh Dalmia, founder, Dalmia Advisory Services, told us, "I do not like PMS and I do not sell them. PMS is sold as a customised product, but in reality it is not. Costs are very high as compared with other investment options. The taxation is not suitable for customers. Besides, the investor has no control on the churning part by the fund house or the fund manager." Mr Dalmia added, "PMSs are operated with no fixed fee structure and capping on expenses on churning. This is obviously not in the interest of the client. In the last couple of years, I have not seen any PMS which has beaten the benchmark index of any diversified equity fund. Of course, PMS will be promoted by the distributors and financial advisors because of the high commission offered by the fund houses which range anywhere between 2%-4%."


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