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.”