Retail margins pressured?
Expansion costs and competitive pressures are beginning to weigh on the financial performance of leading retailers such as Pantaloon Retail, and Shoppers' Stop. In the quarter ended March, both companies reported a strong revenue growth, but profit expansion was subdued. While Pantaloon reported an 89 per cent growth in revenues, net profits rose by 15 per cent. Margins of Shoppers' Stop also dipped by 80 basis points with the departmental store recording a loss in the fourth quarter. Depreciation costs jumped after the company revalued the useful life of its assets. While some of the margin pressure can be explained by aggressive new store openings during the quarter, burgeoning staff costs and increasing interest burden also appear to be straining profit growth. If the trend continues, the stocks' valuations might get tempered.
One-time drag on earnings
Tech Mahindra reported a net loss in the fourth quarter of FY-07 attributable to an exceptional charge. It has, however, recorded a strong growth in revenues and operating profits. In December, Tech Mahindra had signed a $1-billion, five-year outsourcing deal with British Telecom, which encompassed IT services and business process management. Since deals of this size require upfront savings to be shared with the client, Tech Mahindra has made an upfront payment towards `contract concession' amounting to Rs 525 crore ($118 million) to BT. Tech Mahindra claimed that after consultations with its auditors, it has decided to fully expense this amount in its books during the quarter, instead of amortising it over a specified period. Though a sharp escalation in SG &A (selling, general and administrative) expenses impacted the operating profit margin, the company is likely to be less vulnerable to rupee-dollar appreciation, given its focus on the European geography. Revenue from the BT contract are expected to materialise from the second half of FY-08.
Tiles to realty
Nitco Tiles witnessed a 51 per cent revenue growth and a 90 per cent increase in net profits in FY-07. While the company continues to enjoy robust volumes in its ceramic and vitrified tiles business, investors need to track certain developments, which may have significant earnings implications. Nitco recently entered into a joint venture with a Chinese company for sourcing vitrified tiles over the next three years. With increased demand for vitrified tiles (a low-cost substitute for natural granite), higher Chinese sourcing could boost revenues. With exemption from anti-dumping duties on such imports, Nitco may have an edge in the pricing of such products compared to local players. While the core business remains robust, we are cautious about the company's plans to enter real-estate through its 100 per cent subsidiary, Nitco Realties. The company has plans for six projects mostly in Mumbai and Thana, including an IT park at its mosaic tile factory premises. While success in this foray may improve consolidated earnings over the long term, we prefer to now value the company for its tiles business alone. The company lacks experience in the real-estate business and may have to compete with bigger players to establish itself.