The Kishore Biyani-owned enterprise continues to struggle despite increased revenues during the third quarter. Pantaloon can neither reduce its debt to increase cash flow nor increase it fund expansions as in the past. Is it condemned to a slow death if it is not taken over?

Even though Pantaloon’s sales increased 9.6% year-on-year (y-o-y) to Rs3,170 crore for the quarter ended December 2012, interest and debt continue to remain a key concern for the retailer. The interest burden of the company is so high that as much as 95.8% of its earnings before interest and tax (EBIT) is the interest component. The company recorded Rs163.50 crore of EBIT whereas its interest component was Rs156.70 crore. This wasn’t any different from the Rs158.20 crore of interest in the same quarter last year.
 

The company’s consolidated debt for the quarter has reduced by little less than a percent y-o-y. Consolidated debt stood at a whopping Rs6,990 crore as on December 2012, down from the Rs7,150 crore  as on June 2011. According to an Edelweiss report, “Interest burden though contained, continued to weigh heavily on profit. The sequential reduction is primarily attributable to lower cost of debt on account of renegotiation of interest rate.” Pantaloon somehow manages to survive by renegotiating its interest rates with banks.
 

The December quarter has been characterised by high interest rates (it was cut only in January) and a slowing economy. Consumers were reluctant to spend that much. Same store sales (SSS) weren’t all that impressive. According to Edelweiss, SSS growth, for the three months ended December 2012, was at 12.7% in lifestyle retail while value retail SSS grew at 5.1%. Weak performance continued in home retail with a decline of 3.4% y-o-y SSS growth. Furthermore, the Edelweiss report said, “Though gross retail space addition was 0.41mn sq ft, net addition was a mere 0.02mn sq ft owing to some store closures.”
 

Check some of our articles on how Pantaloon’s debt burden was killing it:
Pantaloons growth is expected to come under pressure due to massive debt
 

Will Pantaloon Retail now slow down starved of debt diet?
 

The company is currently undergoing a ‘restructuring’ programme to rid of its gargantuan debt. According to Edelweiss, the demerger of the Pantaloon retail format is likely to come through by March 2013. The realignment process into three separate entities is likely to be completed by September 2013. These developments will further help reduce debt by Rs2,800 crore, according to Edelweiss. Last year, to survive, it agreed to sell the Pantaloons Format Business (PFB) stores to Aditya Birla Nuvo for Rs800 crore.
 

All this is ironical. Kishore Biyani, the promoter and high-profile figure behind Pantaloon Retail came up with a self-promoted book called “It Happened in India” which highlighted the achievements of Pantaloons and his rise from humble beginnings. It was supposed to be an inspiration to many but readers who are well aware and well versed with the company’s numbers will think otherwise. In the book, it is mentioned that he wants to capture every Indians’ wallet share, from the ultra-rich to the lower middle-class. It is with this one-track mind that he singularly focused on borrowing massive amounts of money and piling up loans, hoping to be the next ‘Wal-Mart’. Rather than worry and create a robust business model that could be built over time, he was in a hurry and wanted to build an empire in no time. Of course, this strategy was suspect all along and has backfired. After all, retailing is a low margin business, a drawback that can only be overcome only with a strong customer pull. And Pantaloon has not created any connect with its customers.