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Indian Institute of Management Bangalore

PGSEM 2012

Submitted to Prof. M.S. Narasimhan

Submitted by


Pantaloon Retail (India) Limited, is Indias leading retailer that operates multipleretail formats in both the value and lifestyle segment of the Indian consumer market. Pantaloon Retail is the flagship company of Future Group, Indias retail pioneer cater ing to the entire Indian consumption space. Pantaloon retail opened in 1997. Pantaloon Retail currently serves customers in 85 cities and 60 rural locations across the country through over 15 million square feet of retail space. It operates in multiple retail formats in both the value and lifestyle segments of the Indian consumer market including: Pantaloon s Fresh fashion, Big Bazaar, Home Town, Food Bazaar, Central, e-zone, Brand Factory, Ethnicity, Planet Sports, aLL and more. It has different categories of products including: Wellness & Beauty Leisure & Entertainment General Merchandise Food & groceries Home dcor & Electronics Telecom & IT Fashion Books & Music

Financial Highlights
Sales (Net of Taxes) Operating Income Other Income Total Income Profit before Depreciation & tax Less: Depreciation Profit before Taxes and Exceptional Item Less : Exceptional Item Profit before Tax Less: Earlier Years Income Tax Less: Provision for Taxation Profit after Tax Add: Profit brought forward from previous year Surplus available for appropriation APPROPRIATION Debenture Redemption Reserve Proposed Dividend Provision for Dividend Tax Transfer to General Reserve Balance carried to Balance Sheet 2010-11 2009-10 3943.74 5706.07 153.69 228.3 17.05 84.63 4114.48 6019 261.66 388.45 146.37 161.88 115.29 226.57 12.93 115.29 213.64 2.08 -3.17 36.54 37.25 76.67 179.56 495.98 380.54 572.81 558.97 35 20.27 3.29 7.87 506.37 25 17.13 2.91 17.95 495.98

Financial Ratios Analysis

Note: The company reports its financial results in the calendar cycle of July to June. Hence all results are indicated as of 30th June. We consider financial data from capitaline and annual reports (both adhere to same time frame and are consistent in that regard). All the company information is published by the company on its official site. Financial analysis is the process of identifying the financial strengths and weakness of the firm by establishing relationships between the items of the balance sheet and profit & loss account. Financial analysis can be undertaken by the management of the firm, or by the parties outside the firm, viz. owners, creditors, investors and others. Ratio analysis is a powerful tool for financial analysis. A ratio is defined as the indicated quotient of two or more mathematical expressions or as the relationship between two or more things. In financial analysis, a ratio is used as a benchmark for evaluating the financial position and performance of the firm. The relationship between two accounting figures, expressed mathematically, is known as a financial ratio. Ratios help to summarize large quantities of financial data and make qualitative judgment about the firms financial position. Inputs from financial analysis also help the firms management to plan strategies for the firms future. We present our analysis in the following format: 1. 2. 3. 4. 5. Ratio with its definition Satisfactory value for ratio Ratio value for past year Trend over past 10 years Analysis (+recommendation if possible)

Basic indicators
1. Return on Total Assets (ROTA) = Profit before interest and taxes / Total Assets Jun Jun 11 Jun 10 Jun 09 Jun 08 Jun 07 Jun 06 Jun 05 Jun 04 Jun 03 02 9.01% 16.33% 13.35% 12.17% 13.05% 13.35% 18.75% 17.40% 11.90% 8.51% ROTA has fallen significantly in 2011. It shows that company is generating 9Rs for every 100Rs that it invests. 2. Return on Investment (ROI) = Profit before interest and taxes/(FA + Investments + CA) Jun Jun Jun 11 Jun 10 Jun 09 Jun 08 Jun 07 Jun 06 Jun 05 Jun 04 03 02 7.30% 13.42% 11.73% 11.14% 11.66% 11.45% 14.57% 14.56% 9.94% 7.41%


Year ROI

Liquidity ratios
Liquidity ratios indicate the firms ability to meet short term obligations. 1. Current Ratio: ratio of Current Assets to Current Liabilities. Current ratio of 2 or above is considered safe for companies. For Pantaloon Retail the current ratio for 2011 is 2.1. The ratio trend for past 10 years is Year Current ratio Jun 11 Jun 10 Jun 09 Jun 08 Jun 07 Jun 06 Jun 05 Jun 04 Jun 03 Jun 02 2.10 2.16 3.50 4.12 4.86 3.44 2.73 3.13 2.50 2.81

We can clearly see that the company has maintained this ratio above 2 (it is far greater for certain years). This signifies that the company is more than sufficiently liquid. 2. Quick ratio: Ratio is given by (Current Assets Inventory )/ (Current liabilities short term loans) . It is a measure of short term solvency for a firm. It is different from the current ratio in the sense that it gives liquidity for the firm even if the inventory cannot be sold. For Pantaloon Retail the current ratio for 2011 is 0.63. The ratio trend for past 10 years is Jun Jun Jun Jun Jun 11 Jun 10 Jun 09 Jun 08 Jun 07 Jun 06 05 04 03 02 0.63 0.73 1.60 1.88 2.40 1.37 0.87 0.99 0.78 0.96

Year quick ratio

The quick ratio is less than 1. It has fallen from 1.6 in 2009 over past two years. Since the current ratio is more than 2 we can infer that the company has increased its inventory levels. The level of inventory held by the company is indicated by the inventory turnover days ratio so lets check that 3. Inventory turnover days (Inventory holding period) = 365 / (Cost of goods sold/ Inventory) This ratio gives the no of days the inventory is held by the company. Since pantaloon retail is trading company (does not manufacture the goods that it sells) we consider the COGS instead of COGM. Year Inventory turnover days Jun 11 Jun 10 Jun 09 Jun 08 Jun 07 117 97 101 102 99

The ratio has increased over the past 5 years indicating that inventory holding period by the company has gone up. This could be one reason the quick ratio is less than 1. Company should reduce this period to maintain liquidity.

Leverage Ratios
Leverage is the degree to which an investor or business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Debt brings positive effect to equity shareholders if the debt funds are used at a rate (ROI) more than cost of debt or interest rate. Leverage ratios can be used by lenders and financial institutions to check the ability of firm to repay its debt. 1. Debt to equity ratio: Indicates the proportion of debt to total capital or equity. High values indicate higher risk for the lenders. Recommended max value is 50%. Jun Jun Jun Jun Year Jun 11 Jun 10 Jun 09 Jun 08 Jun 07 Jun 06 05 04 03 02 debt to equity ratio 17% 5% 13% 11% 32% 33% 14% 23% 2% 0% We consider only unsecured loans since secured loans have a guarantee of repayment. Pantaloon retail has consistently maintained a low debt equity ratio. This indicates the company has a low risk profile with additional debt capacity of 33% Lenders can safely lend money to Pantaloon retail. 2. Debt service coverage ratio: indicates if the firm has enough cash to service predetermined financial obligations. DSCR = (PBDIT/ interest), also called coverage ratio. Year Debt-Service Ratio Jun 11 Jun 10 Jun 09 Jun 08 Jun 07 2.29 2.31 2.12 2.51 3.43

Since the ratio is more than 2 the company has enough earnings to service its commitments.

Asset management
1. Total asset turnover ratio = total income / total assets This ratio indicates the capacity of the firm to efficiently utilize the assets of the company to generate income. Jun Jun Jun Jun Year Jun 11 Jun 10 Jun 09 Jun 08 Jun 07 Jun 06 05 04 03 02 Total asset turnover ratio 0.96 1.36 1.38 1.47 1.61 1.95 2.42 2.07 1.41 1.10 The company has maintained the ratio over 1 for many years except last year when the value has fallen below 1. Observing the trend from 2004 the value of the ratio has consistently fallen. To drill down further we look at the fixed asset turnover ratio 2. Fixed asset turnover ratio: Net sales/ fixed assets Here we have taken fixed assets as net block, net sales = (total sales excise) ; other income is not considered (other income includes Miscellaneous Income, Profit on Sale of Investments, Share in jointly controlled entities acc. to schedule 14)

Jun Jun Jun Jun Year Jun 11 Jun 10 Jun 09 Jun 08 Jun 07 06 Jun 05 04 03 02 fixed asset turnover ratio 2.95 5.63 4.25 4.42 5.03 6.34 5.08 4.08 1.96 1.51 Fixed asset turnover ratio is high (compared to Total asset turnover ratio) mainly because it is a retail firm with low fixed assets comparative to a manufacturing firm which would have plant and machinery. The number has fallen over the years indicating poorer utilization of the fixed assets over the years. 3. Net asset turnover ratio: net sales/ net assets

Year net asset turnover ratio

Jun Jun Jun Jun 11 Jun 10 Jun 09 Jun 08 Jun 07 Jun 06 Jun 05 04 03 02 3.29 6.13 2.84 2.66 2.44 3.28 4.24 4.18 4.43 3.29

We can see that both the Net asset TO ratio and fixed asset TO ratio have fallen significantly from 2010 to 2011. This translates to fall in total asset TO ratio. Company should analyze this seriously and try to break the downward trend.

Profitability ratios
These ratios indicate the companys ability to generate income w.r.t. expenses of the company. Analysis of these ratios indicates the cost efficiency of the firm. 1. Profit margin: = PBIT / total sales Jun Jun Jun Jun 11 Jun 10 Jun 09 Jun 08 Jun 07 Jun 06 Jun 05 04 03 02 9.40% 12.02% 9.69% 8.27% 8.10% 6.85% 7.76% 8.40% 8.43% 7.75%

Year profit margin

Profit margin has reduced from 12.02% to 9.40%. However looking at the long term margin values the company has not significantly improved its margins over the years. 2. Cost ratios: indicate the changes in costs of individual items over the years. Jun 11 68.04% 4.43% 20.34% 4.09% 3.10% Jun10 62.07% 5.00% 24.39% 5.56% 2.99%

Material to COGS Employee Cost to COGS Manufacturing, administrative, selling and distribution expenses to COGS* Interest to COGS Depreciation to COGS

Cost ratios indicate that the material costs have gone up for Pantaloon Retail. The costs for employees, and other costs like manufacturing, admin, S&D expenses have actually reduced. This indicates that the company is managing its internal costs well. Material

costs are sometimes outside the control of the company, if they continue to increase the company would have to look at other sources of materials or take some corrective action.

Inter firm comparison

Trent Ltd. is a subsidiary of Tata group. It is a is a retail operations company that owns and manages a number of retail chains in India. Established in 1998, Trent runs lifestyle chain Westside, one of Indias largest and fastest growing chain of lifestyle retail stores, Star Bazaar, a hypermarket chain, Landmark, a books and music chain, and Fashion Yatra, a complete family fashion store. Areas of business

Westside: With a number of stores across India, this chain offers clothes, footwear and accessories for men, women and children, along with furnishings, artifacts and a range of home accessories. Star Bazaar: This hypermarket chain offers a wide choice of products, including staple foods, beverages, health and beauty products, vegetables, fruits, dairy and nonvegetarian products. Landmark: A leader in the books and music category, this chain has a range of over 100,000 titles in books and music, and also stocks movies, toys, gift items and stationery. Fashion Yatra: The stores bring quality fashion at low prices to value conscious customers in towns across India.

Comparison of some key ratios for Pantaloon Retail and Trent Ltd: Pantaloon Trent 153.15 949.2 3.63 17.34 9.40% -2.99% 2.1 3 0.96 2.46

Market price (on 30 march 2012) Earnings per share Profit Before Interest And Tax Margin(%) Current Ratio Asset Turnover Ratio


Compared to Pantaloon Retail, Trent has performed very well on the stock market. Its EPS ratio has been constantly outperforming Pantaloon and has remain high for past 5 years. Current ratio of Trent is also high (3) indicating that has high liquidity. Trent also manages its assets well indicated by its Asset turnover ratio. However in the past 3 years Trent has shown negative profit margins.