The stock of Pantaloon Retail has shot up 41 per cent since January this year. Investors in the stock can use this rally to sell their holdings, with the company bogged down by heavy debt and slowing sales.

At Rs 184, the stock trades at 35 times trailing consolidated four-quarter earnings. While at a discount to peers, Pantaloon is facing a severe funds crunch and, in this light, has been forced to scale back expansion plans. Pantaloon's revenue growth for the September and December '11 quarters also lags peers.

Sales slowdown

Pantaloon operates in three segments. The first is value retail, encompassing hypermarket Big Bazaar, Food Bazaar and KB Fair Price. The second is lifestyle, which includes Pantaloon, Brand Factory and Central, which are primarily retail apparel. The last category is home solutions which includes Home Town.

Rising food and fuel prices of the past few months meant that these expenses took away a greater share of consumer wallets, leaving less room for discretionary purchases.

Apparel, which forms a major segment for Pantaloon, also saw prices go up as a result of excise duty levied on branded apparel. Ideally, a widespread presence should help stem the brunt of a spending slowdown. However, all segments of Pantaloon recorded declining same-store sales growth (growth in sales of stores open for a year or more).

Value retail formats clocked a same-store sales growth of 3-4 per cent in the past two quarters. This is a far cry from the double-digit figures of the previous quarters.

This trend is mirrored in lifestyle formats with same-store growth slowing to 3 per cent. Home solutions formats fared worst with same-store sales declining 3 per cent.

Though January sales for the company have been good according to the management, much of it may be attributed to the steep discounts offered in flagship formats, Big Bazaar and Pantaloon.

Debt trouble

Consolidated debt almost doubled during FY-11 (Pantaloon's financial year ends in June) to reach Rs 7,846 crore. In the six months ended December '11, interest costs shot up 66 per cent. With the slowdown in sales, interest costs led the company to record a net profit fall of 36 per cent in the September '11 quarter which worsened further to a net loss by the December '11 quarter. Interest cover dwindled to a low 1.2 times. Lower raw material costs helped operating margins improve to 11 per cent for the six months ended December '11, against 8 per cent in the year-ago period. Net margins dropped to less than 1 per cent.

In any case, interest costs have always bogged down satisfactory operating margins. Interest outgo, currently at 8 per cent of sales, has been on the higher side at 5 per cent of sales in the previous years too. The company has managed to average a net profit margin of about 1 per cent over the past several quarters.

It is also scaling back expansion plans. But the low same-store sales growth suggests that reliance on existing stores could limit revenue expansion in the near term.

Funds crunch

The company has the authorisation to raise up to Rs 1,500 crore in equity, but it may find it hard under current market conditions . Promoters have already forfeited converting warrants which would have brought in Rs 300 crore. It has begun to explore restructuring plans, but in the near-term, a significant reduction in debt and interest seems unlikely.

Pantaloon is also a prime beneficiary if the clamp-down on foreign direct investment in multi-brand retail is lifted. But there is limited clarity on how deals could be structured if the conditions on which FDI was earlier allowed remain. For instance, Pantaloon's multi-city presence directly violates the condition that foreign retail will be allowed only in select cities. In any case, for deals to be worked out and capital to flow in will take several quarters still.

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