pantaloons ratio analysis

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National Institute of Fashion Technology

HYDERABAD

Master of Fashion Management (2013-15)

FINANCIAL MANAGEMENT

“Performance Ratio Analysis”

Faculty: Submitted By:

Mrs. A. Rajyalakshmi Dhwani Shah

(10)

HYD13MM21

Submission Date:

21st Sep 2014



OUTLINE

SERIAL

NO.

TITLE

1. Introduction & Industry Overview

2. Financial Analysis

3. Risk and other relevant issues

4. Conclusion

5. Bibliography

6. Annexures



Introduction & Industry Overview:

Pantaloons is among the top three large format fashion retailers in India. With a strong focus

on ‘Fresh Fashion’, ‘Indian-ness’ and ‘Customer Centricity’, Pantaloons has emerged as a

strong brand in the fashion industry over the past two decades. The company launched 14

new Pantaloons stores in the year 2013 taking the total count to 81 stores. Its target is to reach

100 stores in fiscal 2014-15.

The long term growth potential of Indian retail industry is intact & the size of the Indian retail

market at USD 0.5 trillion in 2012 is expected to grow at a CAGR of 12.7% to reach USD 1.3

trillion by 2020. Rising income levels and preference towards quality products are likely to

drive consumption expenditure in India. Organised Retail will be one of the biggest

beneficiaries of this growth projected to grow at a CAGR of 30% from USD 27 billion in

2012 to USD 220 billion by 2020.

Key Competitors:

The key competitors of Pantaloons will be Shoppers Stop, Trent, Westside and Lifestyle.

These players are in the same business much before Pantaloons. Lifestyle is doing much

better business as compared to pantaloons which can be seen from the financial report of

lifestyle. As such Pantaloons does not have any foreign player as their competitor, though

they have a lot of in-house brands, they don’t fall in the segment of offering when compared

to foreign brands. However now-a-days they are facing tough competition from online

fashion retailers like Myntra, Jabong etc

Price Sensitive:

Pantaloons along with its own in-house brands, offers many other high end brands. The

product of the in-house brands mainly satisfies the needs of the upper middle class customers

who cannot afford the high ended products. Hence the demand for the in house brands is

price sensitive whereas the customer who plans to buy the high ended brands are not so price

sensitive.



-15

-10

-5

0

5

10

20142013

20122011

Net profit margin

Business Performance Ratios:

Net Profit Margin:

Years 2014 2013 2012 2011

Net profitmargin %

-11.26 -5.1 6.48 0.07

• Even though the finance

cost of the company

declined from last year the

overall increase in

expenses and decrease insales growth compared to

FY 2013. The net profit

margins of the company

were negative in FY 2014

& FY 2013 i.e. -11.26%

and -5.1.

• The net profit percentage is the ratio of after-tax profits to net sales. It reveals the

remaining profit after all costs of production, administration, and financing have been

deducted from sales, and income taxes recognized. As such, it is one of the best

measures of the overall results of a firm, especially when combined with an

evaluation of how well it is using its working capital. The measure is commonly

reported on a trend line, to judge performance over time. It is also used to compare the

results of a business with its competitors.

• The company uses the formula for the net profit ratio is to divide net profit by net

sales, and then multiply by 100.

• The gross profit margin of the company has decreased since 2013 from 0.9% to -

4.55% mainly due to increase in purchase of stock in trade by the company, which

increased from 1493 Lacs to 98976 Lacs.



-32.42

89.12

174.28

2014 2013 2012

R O E %

years

Return on Equity: ROE = Annual Net Income/Average Stockholders' Equity

Year 2014 2013 2012 2011

ROE -32.42 89.12 174.28 -

Operating Profit: During the year, business invested in organisation building, stores

expansion, people and processes. Gross margin improved year on year owing to

improved product mix and better pricing. However , bottom-line was strained which

was due to effects of organisation

building costs compared to allocation

of costs till last year. The company

posted EBITDA excluding otherincome at Rs. 33 Crore against Rs. 66

Crore during last year.

The return on equity is -32.42%. The

ROE is negative due to negative

profit margin -11.26%.

Investors in the company will be

willing to stick around as they know that the company has the potential to quickly

turn its negative return into a positive return and bring in high profits, sales as last 2

years there has been positive rate of returns.

However, the investors might be sceptical in investing as the ROE is decreasing every

year and FY 2014 they have seen a negative return on net worth.

But as of now there is negative returns which means that the firm is not efficient in

generating income over their investment.



-1600

-1400

-1200

-1000

-800

-600

-400

-200

0

200

2014 2013 2012 2011

EPS

Earnings Per share (EPS):

Year 2014 2013 2012 2011

EPS -20.23 -1337 24.40 0.20

The price-earnings ratio is arguably the most popular fundamental factor used by

investors who try to

determine the

attractiveness of an

asset's current value and,

more importantly,

whether the current pricelevel makes for a good

buying opportunity.

The EPS is negative in

two consecutive financial

years is because the

negative returns of the company.

EPS of the company has been to a very low state that is -20.23 in FY 2014

whereas in 2013, it faced tremendous decline where EPS was -1337.

This is a very unhealthy position for the company as the investors would be very

sceptical in investing in the company due to negative EPS.

The negative EPS is due to subsequent losses in the FY 2014 & 2013



-10

0

10

20

30

40

50

20142013

20122011

-0.60.52

45.75

ICR

Interest Coverage Ratio: Interest coverage ratio = EBIT / Interest expenses

Year 2014 2013 2012 2011

Interest Cover -0.60 0.52 45.75 -

The Interest coverage ratio decreased from 45 to -0.68 since FY 2013. This indicates

that the company is not able to cover its finance cost with its profits any more. As the

interest coverage ratio is very low and also tends to decline further in this year as

compared to the last year, there are higher chances of the company to default as there

are less earnings to make the interest payments. A company like Pantaloons finding

itself in financial/operational difficulties can stay alive for quite some time as long asit is able to service its interest expenses.

The company is having difficulties in generating cash to pay its necessary obligations

due to merchandise availability issue and subdued consumer sentiments which

impacted the sales growth.

A debt of Rs. 1600 Crore was transferred to the Company with huge interest burden in

the FY 2013, the company should now explore more options for bringing down the

cost of borrowings.

Net interest: Finance cost stood

at Rs. 117 Crore with Average

borrowing cost of about

10.4%, also there a huge

fluctuation in the ratio of last 4

years as seen in the graph. The

company has seen a steady

decline in the past few years.

Thus, the ICR indicates that the

company is in potential danger of not being able to meet its interest obligations.



0

0.5

1

1.5

2014 2013 2012 2011

CURRENT RATIO

Current ratio: Current assets/ Current liabilities

The current ratio was below 1 at 0.26 in 2013.

However there was a recovery in FY 2014

which increased ration to 0.87 which still is

low. Commonly acceptable current ratio is 2;

it's a comfortable financial position for most

enterprises.

This indicates that the firm liquidity position is

tight to fund its liabilities.

The current ratio of Pantaloons indicate that there is a high risk on the firm’s ability to

meet current obligations and there is less safety of funds of the short-term creditors.

The 4 year data of the company shows that the current ratio was highest during the

year 2012, after then there was a steep decrease.

Hence, the customers would view this as a more risky venture. As observed in the

balance sheet the current liabilities are more than the current assets, which says that

the firm would have difficulties in meeting the short term obligations.

Year 2014 2013 2012 2011

Current Ratio 0.87 0.26 1.34 0.89



Quick Ratio:

Years 2014 2013 2012 2011

Quick Ratio 0.23 0.17 1.27 0.77

Quick Ratio is an indicator of company's short-term liquidity. It measures the ability

to use its quick assets (cash and cash equivalents, marketable securities and accounts

receivable) to pay its current liabilities. Ideally, quick ratio should be 1:1.

The lower quick ratio of the company indicate that the company relies too much on

inventory or other assets to pay its short-term liabilities. Many lenders are interested

in this ratio because it does not include inventory, which may or may not be easily

converted into cash.

The formula that the company uses to calculate the quick ratio is

Quick Ratio =

Cash in hand + Cash at Bank + Receivables + Marketable

Securities

Current Liabilities

The company is taking too much risk by not maintaining an appropriate buffer of

liquid resources which may affect the working capital in short as well as long term.

Total Asset Turnover: Sales or Revenues/Total Assets

Total asset turnover has increased from 1.18 to 4.10.

This tells us that the company is utilizing its assets in place efficiently to increase its

revenue. Also the total revenue from operations has increased which shows a goodtrend.

The balance sheet shows that there is an increase in the trade receivables and

introduction of intangible assets which are under development which are possible

reasons for increased assets and also they have substantially increased the sales

turnover and also by increasing the inventory turnover which lead to utilization of

assets optimally to increase the revenues.



Inventory turnover ratio: Cost of goods sold / Average Inventory

Years 2014 2013 2012 2011

Inventory

turnover

4.64 3.96 87.15 -

A high ratio implies either strong sales or ineffective buying. High inventory levels

are unhealthy because they represent an investment with a rate of return of zero. It

also opens the company up to trouble should prices begin to fall.

The company has a reasonable inventory turnover, which has increased since last year

from 3.96 times to 4.64 times which shows that their goods are moving faster as

compared to last year. Creditors are particularly interested in this

because inventory is often put up as collateral for loans. Banks want to know that this

inventory will be easy to sell.

Pantaloons has an effective control over its inventory and they have factory outlets to

deal with the slow moving merchandise.



DTR

Column20

50

100

150

200

250

300

20142013

2012 2011

DTR

Debtors turnover ratio: Net credit sales / average inventory.

Years 2014 2013 2012 2011

Debtors

turnover ratio

138 293 14 -

The debtors’ turnover which has reduced 293 to 138.

A company with a higher ratio shows that credit sales are more likely to be collected

than a company with a lower ratio. Since accounts receivable are often posted ascollateral for loans, quality of

receivables is important.

Observing the trend in the

debtor’s turnover ratio, it is

very unstable seen in the

graph.

In terms of the company the

ratio interprets that the ratio

has lowered in the FY 2014 which is not favourable from the cash flow point of view.

As the company takes time in collecting from its customers, it will take time in paying

the obligations as well.



Debt to Equity: Total liabilities / Shareholders equity

Years 2014 2013 2012 2011

Debt equity ratio 1.75 - 0.73 -

• Higher debt-to-equity ratio is unfavorable because it means that the business relies

more on external lenders thus it is at higher risk, especially at higher interest rates. A

debt-to-equity ratio of 1.00 means that half of the assets of a business are financed by

debts and half by shareholders' equity. A value higher than 1.00 means that more

assets are financed by debt that those financed by money of shareholders' and vice

versa.

• An increasing trend in of debt-to-equity ratio is also alarming because it means that

the percentage of assets of a business which are financed by the debts is increasing.

• The debt to equity ratio has increased to 1.75 times from 0 which shows that the

company is

highly

leveraged

since the debt

is

significantly

more than the

equity.

• As observed in the balance sheet there is a sharp increment in the long – term

borrowings in the FY 2014 which leads to increase in the overall liability of the firm.



Risks & Other relevant Issues:

1. Changing consumer preferences: The taste and preferences of the Indian consumer is

changing rapidly along with the increasing spending power. Style, rich appeal &

occasion specific dressing is what the consumers look at. So in order to keep a pace with

the other players, they need to have a team of dedicated employees who can constantly

monitor the changing trends

2. High fixed cost structure: Fashion retailing business has high operating leverage,

owing to high fixed cost structure. Rentals, selling expenses and overheads form a large

part of the operating costs.

3. Attracting & Retaining talent: Since retail is the business where Human resource plays

a very important role, the loss of key personnel or any inability to manage the attrition

levels in different employee categories may impact the business and ability to grow.

4. Dependence on Real Estate: The fashion retail industry is heavily dependent on

availability of quality retail space at marquee locations at affordable rentals. Non-

availability of retail space in timely or cost effective manner and at right location may

hamper the business growth and profitability

5. Intensifying Competition: There is an intense competition for marquee location with

quality real estate. Given the growth potential of Indian apparel retail market, many

global brands have entered Indian market. Relaxation in FDI norms is likely to further

intensify the competition.

Conclusion:

Considering the growth of the Retail industry & Pantaloons as a company, the economies of

scale will accrue leading to better margins & returns. Since they have incurred capital

expenditure in the current year, the real benefits will be reflected in the years to come.



Bibliography:

Pantaloons Annual Report: 2013-2014

http://www.moneycontrol.com/ -Performance Ratios

http://www.moneycontrol.com/



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