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 TITLE
NO.
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.
Business Performance Ratios:
Net Profit Margin:
Years 2014 2013 2012 2011
Net profit -11.26 -5.1 6.48 0.07
margin %

• Even though the finance

Net profit margin
cost of the company
declined from last year the
8
overall increase in expenses 6
4
and decrease in sales 2
0
growth compared to FY -2 2014
-4 2013
2013. The net profit 2012
2011
-6
margins of the company -8
-10
were negative in FY 2014 & -12

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.
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 174.28

costs till last year. The company posted

EBITDA excluding other income at Rs.
ROE % 89.12
33 Crore against Rs. 66 Crore during
last year.
 The return on equity is -32.42%. The
2014 2013 2012
ROE is negative due to negative profit -32.42
margin -11.26%. years
 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.
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
EPS
determine the
200
attractiveness of an asset's
0
2014 2013 2012 2011
current value and, more -200
importantly, whether the -400

current price level makes -600

for a good buying -800

-1000
opportunity.
-1200
 The EPS is negative in two
-1400
consecutive financial years
-1600
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
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 as
it 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

ICR
Rs. 117 Crore with Average
borrowing cost of about 10.4%, 50
also there a huge fluctuation in 40 45.75
30
the ratio of last 4 years as seen in
20
the graph. The company has 10
seen a steady decline in the past 0 -0.6
2014 0.52
-10 2013
few years. 2012
2011
 Thus, the ICR indicates that the
company is in potential danger of not being able to meet its interest obligations.
Current ratio: Current assets/ Current liabilities
Year 2014 2013 2012 2011
Current Ratio 0.87 0.26 1.34 0.89

 The current ratio was below 1 at 0.26 in 2013. CURRENT RATIO

However there was a recovery in FY 2014 which 1.6
1.4
increased ration to 0.87 which still is low. 1.2
1
Commonly acceptable current ratio is 2; it's a 0.8
comfortable financial position for most 0.6
0.4
enterprises. 0.2
0
 This indicates that the firm liquidity position is 2014 2013 2012 2011

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.
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
Cash in hand + Cash at Bank + Receivables + Marketable
Securities
Quick Ratio =

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 good
trend.
 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 4.64 3.96 87.15 -
turnover

 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.
Debtors turnover ratio: Net credit sales / average inventory.
Years 2014 2013 2012 2011
Debtors 138 293 14 -
turnover ratio

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 as
collateral for loans, quality of
300
receivables is important. 250
 Observing the trend in the 200
debtor’s turnover ratio, it is very 150

unstable seen in the graph. 100

50

0 Column3
 In terms of the company the Column2
2014
2013 DTR
ratio interprets that the ratio has 2012
2011
lowered in the FY 2014 which is DTR
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