The previous fiscal was a humbling one for Indian retailers. Pantaloon Retail (India) Ltd was no exception, with its FY09 (year ended 30 June) stand-alone net profit growing by just 12% to Rs141 crore while sales grew by 25.6% to Rs6,342 crore. On a consolidated basis, while sales grew by 31%, it incurred a net loss before minority interest of Rs7.25 crore, lower than the previous year’s loss of Rs29.4 crore. Pantaloon’s share price rose by 1.4% on Tuesday, either because its results were in line with expectations or investors were enthused by the company’s changed strategy.
All these years, Pantaloon has been focusing on growth, reckoning that if it occupied prime space in the best retail developments, it will get a significant edge. This strategy involved being constantly in the investment mode, setting up new stores even as existing ones trudged towards break-even. Now, Pantaloon is changing focus from rapid sales growth to profitable growth. It expects its retail space to increase to 25 million sq. ft from 13 million sq. ft at present by around FY14 and revenues to grow at a more sedate pace of 25% annually. That is a big step down from its compound annual growth rate of 76% in space and 54% in sales, since 1999.
Its new focus areas are efficiencies, cost reduction and margin improvement. It expects to achieve these by getting more favourable terms from real estate developers, leading to lower rentals. It expects employee costs to be more manageable as the mad rush for retail talent has abated. In FY09, its consolidated employee costs jumped 29% though it was flat on a stand-alone basis. Rising demand from a growing number of retailers had also affected itspurchasing power, which it expects to regain as a number of fringe players have exited the market.
That will be good news for investors as the main drawback in Pantaloon’s performance is not at the operating level. On a stand-alone basis, in FY09, its operating profit margin has risen by 143 basis points. On a consolidated basis, by 148 basis points. One basis point is a hundredth of a percentage point.
However, net profit growth was hit by a sharp rise in depreciation and interest costs, of 75% and 87%, respectively, on a consolidated basis.
Pantaloon’s current strategy will mean that it will sweat its existing assets, improve operating margins; and the cash flows from its profitable stores can be used to pay down debt. In addition, a slower pace of expansion also means that Pantaloon will dilute equity at less frequent intervals. All of that translates into faster earnings expansion in thefuture, which is good news for shareholders. There is likely to be a time lag before Pantaloon’s new strategy shows up in its results. That may explain why its share price did not rise more sharply.