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Shanthi Venkataraman

Pantaloon is an aggressive player in the retail space, with a presence across multiple formats. The ability to repeat its strong performance across newer formats would determine its future growth.

Hoping to replicate its success with garments in other businesses.

INVESTORS with an appetite for risk can consider exposures in the stock of Pantaloon Retail. Pantaloon is a front-runner in the fledgling organised retail industry. Besides being one of only two listed retail companies, a rapid expansion in retail space and high growth numbers has the stock trading at rather rich levels.

Pantaloon has rapidly garnered retail space, having set up more than 30 outlets all over the country over the past six years. The company is expected to post a turnover of Rs 650 crore in FY04 and has targeted an ambitious target of Rs 1,000 crore in FY05. The company has established stores across multiple formats — departmental store (Pantaloon), hypermarket (Big Bazaar), grocery retailing (Food Bazaar) and, recently, malls (Central Mall). Already an established player in the apparel retailing business, its success with the hypermarket format makes it a formidable player in the retail space.

Profits grew at a compound annual growth rate (CAGR) of about 35 per cent over the past five years and Pantaloon appears set to record similar levels in the next couple of years.

Glitches in expansion plans, a possible dilution of equity on account of an expansion to fund growth and a possible drop in valuations following the IPO of Shoppers Stop, are the risks to our recommendation. The growing proportion of low-margin products in the product mix is also a cause for concern.

Volumes driving growth

Although revenue growth has been strong, it has been volume-driven. Pantaloon, which traditionally started as an apparel retailer, has emerged as a serious player in the food and grocery retailing (value retailing) business, through its Big Bazaar and Food Bazaar outlets. Although apparel still remains as its main revenue and earnings driver, low-margin food and grocery products have, over the years, increasingly contributed to its revenues. The company, therefore, lacks a cushion to protect its profits in a sluggish market. The management, however, appears determined to restrict the sales contribution of grocery retailing to 30 per cent of topline.

Enhancing margins

Operating margins took a dip in FY02, when Big Bazaar, which followed the discount store model, was launched. However, margins have improved since then.

Strict inventory control, backward integration and the use of private labels are some of the measures that have been taken to improve margins. Pantaloon has a stock conversion period of about 90 days. This is moderate, considering that it retails a wide range of products with divergent inventory policies.

With Food Bazaar, the company has attempted to set up shop close to its suppliers. For instance, it sources dry staples such as rice and wheat directly from millers.

Pantaloon is integrated backwards in the apparel business, with its group company, Pantaloon Industries — supplying fabric. This enables it to have some control over the cost and quality of its apparel. It markets most of its products under private labels, thus offering products that cost 20-25 per cent lower than branded items, owing to an absence of advertising and other related expenses.

The use of private labels has met with some success in apparel retailing. A growing share of private labels would have a favourable impact on the company's margins.

Growing at a frenetic pace

The company is on an aggressive expansion path, foraying into Tier-II and Tier-III cities. This would mean a different set of challenges as against the urban set-up.

With Food bazaar, it has attempted to compete with the kirana or general store format (which remains a dominant force), with its mandi system (customers are allowed to pick and choose their fruits and vegetables as they do with the local vendor) and home delivery services.

Even as it increases the number of outlets, Pantaloon's same store sales, particularly that of its hypermarket and grocery businesses, remain reasonable.

Apparel retailing grew at only 2 per cent, while value retailing (big bazaar and food bazaar) rose 25 per cent. In the future, however, revenues are likely to even out across outlets, as new stores may cannibalise the sales of existing ones.

Pantaloon plans to enter other retailing formats such as footwear and white goods, which require different expertise and strategies.

The company's ability to replicate its success with its Big Bazaar and Food Bazaar outlets across other retail formats would be its major challenge.

The company, for the present, intends to focus only on the four main formats. Emerging competition in the hypermarkets arena would necessitate constant innovation, which would determine the company's success.

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