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Q2FY11 disappointing: Revenues plunge 53%; PAT declines 91% Y-o-Y
Koutons Retail’s (KRIL) Q2FY11 revenues plunged ~53% Y-o-Y, to INR 1.6 bn,
vis-à-vis 3.4 bn in Q2FY10. EBITDA margins declined 112bps, following higher
other operating expenses of 565bps, which was partially offset by lower COGS of
~453bps. Lower sales and EBITDA margins resulted in core PAT decline of
91.3%, to INR 20 mn.
Troubled times brewing with rising debt
Interest costs for FY10 constituted a good 8% of sales. Debt-to-equity stands at
1.3x for FY10. KRIL is likely to face delay in debt repayments and is facing
lawsuits by its suppliers for recovery of dues. Moreover, ICRA has suspended
rating on the company's bank lines, citing lack of sufficient information - another
testimony of KRIL’s debt woes.
Consistent underperformance since past 3 quarters
KRIL has been consistently underperforming the retail sector since the past three
quarters, with 23.5% decline in nine month revenue and PAT down 44.7% Y-o-Y.
On the contrary, Shoppers Stop (SSL) and Pantaloons Retail (PRIL) have
performed exceedingly well with revenue growth of 36% and 45% and PAT
growth of ~300% and ~100%, respectively, Y-o-Y in the past nine months.
Moreover, of late, several new regional and national players have entered the
industry, intensifying the competition for KRIL, hitting its profitability.
Outlook and valuations: Bleak; downgrade to ‘REDUCE’
Consistent underperformance in terms of sales growth and margin contraction is
a major concern. Owing to decline in profitability, the company is likely to delay
debt repayment, which further weakens its outlook. Also, the company is not
investing in brand building and new product lines - an added concern. Since
other retail companies provide more comfort in terms of performance and
growth, we downgrade KRIL to ‘REDUCE’ from ‘BUY’ and rate it ‘Sector
Underperformer’ on relative returns.
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