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Pricing to drive revenue growth for retail companies in June quarter

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Retail companies such as Pantaloon Retail (India) Ltd and Shoppers Stop Ltd are likely to report sales growth of 12-16 per cent in the quarter ended June from a year earlier for stores that were open for at least 12 months. But this growth is expected to be driven more by pricing rather than by volumes.

In general, retail companies took a price increase of about 20 per cent to set off the impact of higher raw material costs and the excise duty on branded apparel.

According to an analyst, inventory has gone up for most apparel makers during the quarter, which suggests that volume growth may have been affected. That also suggests that the demand would not have been so strong.

While the expected double-digit revenue growth looks decent, the situation may not be that bright as far as profitability is concerned. Analysts expect operating profit margins to remain flat or decline slightly, due to the cost inflation.

Of course, Shoppers Stop would show robust revenue growth on a consolidated basis as financials of HyperCity Retail (India) Ltd would be included in the numbers. Similarly, the net profit would also reflect HyperCity’s performance. HyperCity was a money-losing entity last fiscal.

Since the beginning of this fiscal, both Pantaloon and Shoppers Stop stocks have outperformed the BSE-500 Index of the Bombay Stock Exchange considerably. One of the key reasons for the outperformance is news reports suggesting that the Union cabinet might clear the proposal to allow foreign direct investment (FDI) in multi-brand retail next month.

Of the two stocks, analysts maintain that Shoppers Stop is expensive. Indeed, the stock has delivered excellent returns to investors since the last fiscal. In fiscal 2011 (FY11), the Shoppers Stop stock rose by 73% and it has further increased by 35 per cent so far in this fiscal.

On the other hand, the Pantaloon stock had declined by one-third in FY11, but has increased by 22 per cent since the beginning of this fiscal. That’s because analysts expect Pantaloon to be the key beneficiary if FDI is allowed in multi-brand retails on account of its organizational structure. Even so, Pantaloon’s huge debt and higher inventory continue to worry investors.

Meanwhile, the continuing inflation is likely to have an impact on volumes; although some months down the line, things should be better as consumers slowly adjust to higher prices. Moreover, cotton prices have softened, which should offer some comfort going ahead.

Source : Mint

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