FINANCIAL STATEMENT ANALYSIS

OF

PANTALOON RETAIL INDIA LIMITED

FROM 2005-2009

Submitted to: Pf. Dr. P.R. Wilson SMS CUSAT

Submitted by: Sandeep Varghese Roll no : 38

MBA (FT) 2nd sem. SMS CUSAT.

Introduction Pantaloon Retail (India) Limited, is India’s leading retailer that operates multiple retail formats in both the value and lifestyle segment of the Indian consumer market. It was launched in 1987 and is part of the Future Group. Headquartered in Mumbai (Bombay), the company operates over 16 million square feet of retail space, has over 1000 stores across 73 cities in India and employs over 30,000 people.

The company’s leading formats include Pantaloons, a chain of fashion outlets, Big Bazaar, a uniquely Indian hypermarket chain, Food Bazaar, a supermarket chain, blends the look, touch and feel of Indian bazaars with aspects of modern retail like choice, convenience and quality and Central, a chain of seamless destination malls. Some of its other formats include Brand Factory, Blue Sky, aLL, Top 10 and Star and Sitara.

Different categories

Wellness/ BeautyLeisure/ EntertainmentGeneral MerchandiseHome/ ElectronicsTelecom/ ITFashionBooks/ MusicFoode-tailing

STANDALONE AUDITED FINANCIAL RESULTS FORYEAR ENDED 30TH JUNE, 2009 (Rs. In crores)

Particulars Year ended Year ended Growth 30th June 2009 30th June 2008 Net Sales/Incomefrom Operations 6,341.70 5048.91 25.6%Profit from Operations beforeother Income and Interest 528.39 377.13 29.6%Profit Before Tax 216.23 195.62 10.5%Net Profit 140.58 125.97 11.6%Paid up equity share capital(Face value of Rs.2 per share) 38.06 31.86 19.5%Reserves excludingRevaluation Reserves 2,211.47 1,751.50 26.3%BASIC EPS & DILUTED EPS :a) Equity Shares 7.94 7.54b) Class B Shares (Series 1) 8.04

Management Discussion and Analysis

The scope and potential of the Indian economy in general, and the domestic consumption sector in particular is characterized by some irreversible trends. These include a young demographic profile, increasing consumer aspirations, growing middle class in urban areas and the growth in the rural economy. However, the last twelve months were also characterized with an unprecedented economic turmoil that tested managerial, strategic and leadership skills across organizations. The organization rose up to the challenge by taking significant steps to secure, preserve and enhance its economic value creation.

Operational Overview

The two key strategic objectives that the Company has pursued are gaining a leadership position in key geographies and in key categories of consumption. The top eight cities–Mumbai, Delhi, Bangalore, Kolkata, Hyderabad, Chennai, Pune and Ahmedabad- is where the largest share of addressable consumption markets resides. Now, almost 60% of the Company’s stores are located in these key eight cities and 25% are in the fast growing tier II cities and the balance in the tier III and smaller towns. The Company intends to continue building its dominance within the bigger cities for which its roadmap is clear.

The Company has identified four categories that it will focus on and these categories capture more than 70% of the consumers’ wallet. These categories are – fashion, food, general merchandise and home, which includes consumer electronics and furniture.

Customer and Marketing Overview

The focus for the Company is as much on acquiring new customers as it is on gaining a larger share of the consumption spends from existing customers. The Company has already introduced a group-wide loyalty program, Future Privileges, which works towards encouraging customers to spend across multiple formats of the Company for all their needs. The program is designed in a manner such that every member of the programspends atleast Rs 1,00,000 in various product category only within the Company’s retail formats. In addition, the existing loyalty programs were further strengthened, with the flagship program, Pantaloons Green Card contributing more than a 50% of the revenues from the Pantaloons chain.

In view of the existing economic environment, the loyalty program initiatives helped conserve advertisement costs without impacting sales. These initiatives were complimented with an unprecedented number of events and festivals held within stores to

keep the excitement alive within the store and fight the falling consumer sentiment in the economy.Human Resource Initiatives

At Pantaloon Retail, the management believes that its sustainable competitive advantage lies in the talent that it nurtures and the leadership pipeline that it has built to manage its multiple business. The Company places a huge emphasis on fostering a culture of innovation and enterprise that allows people within the Company to realise human beings' infinite potential. The Company is bound together by a set of values that are inspired from the Indian way of life, the Indian spirit of ingenuity, enterprise and respect for Indian cultural ethos and community. These have built a unique work environment within the Company that brings together talent from multiple backgrounds and skills sets to work together and feel a sense of belonging to the team. This success of this can be judged from the low level of attrition that the Company 28 Pantaloon Retail (India) Limited. has been able to maintain and the stability in its senior and middle management teams.

Business Outlook

The current year marked a significant milestone for the Company when it opened its 100th Big Bazaar store within a record time of seven years. As on June 30, the Company operated 116 Big Bazaars, 148 Food Bazaars, 45 Pantaloons and 9 Centrals, that covered 9.7 million square feet of retail space and attracted footfalls of 185 million customers. This data is only of Pantaloon Retail (India) Limited and does not include that of its subsidiaries.

Risks and Threats

The business risk from competition has temporarily reduced in last one year due to exit of some of the players and change of strategy of other players in the organised retail business. However, with revival of the economy it would surely attract new players, who would enter the business in more planned manner and better financial resources. The Company being present across various categories and capturing various segments of customers, would be able to meet competition without much problem.

The recent downturn gave opportunity to the Company to concentrate on reduction of its various costs, which your Company encashed and reduced costs in various heads including on real estate, people cost, administration, inventory management, logistics etc. This would help the Company to have more commanding position and provide products and services at much better rate to the customers and have better realizations due to increased consumption at its various formats.

Financial Ratios Analysis

Financial analysis is the process of identifying the financial strengths and weakness of the firm by properly establishing relationships between the items of the balance sheet and profit & loss account. Financial analysis can be undertaken by 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 firm’s financial position.

Liquidity ratios

They measure the ability if the firm to meet its current obligations.

1. Current Ratio

It is the measure of the firm’s short term solvency. As a conventional rule, a current ratio of 2:1 or more is considered satisfactory. It represents a margin of safety for creditors.

Current ratio = Current Assets Current liabilities

Year  Current Ratio

2005  2.79

2006  3.44

2007  4.86

2008  4.10

2009  3.60

The current ratio of Pantaloon Retail India Limited is considered highly satisfactory since the ratios are more than 2 every year. It signifies the company is more than sufficiently liquid.

2. Quick Ratio

It establishes a relationship between quick or liquid assets and current liabilities. Quick ratio of 1:1 is generally considered satisfactory.

Quick ratio = Current Assets – Inventories Current Liabilities

Year  Quick Ratio

2005  0.88

2006  1.37

2007  2.40

2008  1.87

2009  1.64

Thus for Pantaloon Retail India Limited, since the quick ratios maintain above 1, they can easily pay off its current liabilities even if the inventories are not sold.

3. Cash Ratio

The cash ratio is an indicator of a company's liquidity that further refines both the current ratio and the quick ratio by measuring the amount of cash, cash equivalents or invested funds there are in current assets to cover current liabilities.

Cash Ratio = Cash + Marketable Securities Current Liabilities

Year  Cash Ratio

2005  0.42

2006  0.80

2007  1.21

2008  1.14

2009  1.19

4. Net Working Capital Ratio

The difference between current assets and current liabilities excluding short-term bank borrowing is called net working capital (NWC) or net current assets (NCA). A declining working capital ratio over a longer time period could be a red flag that warrants further analysis. It measures the firm’s potential reservoir of funds.

Net Working Capital Ratio = Net Working Capital (NWC) Net Assets (NA)

Working Capital or Net Current Assets = Current Assets – Current Liabilities Net Assets = Total Assets – Total Liabilities

Year  NWC

2005  0.49

2006  0.52

2007  0.56

2008  0.48

2009  0.45

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. Leverage is not always bad, however; it can increase the shareholders' return on their investment and often there are tax advantages associated with borrowing. also called financial leverage.

Leverage ratio is any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. It is a ratio used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income.

1. Debt ratio

A ratio that indicates what proportion of debt a company has relative to its assets. It is the measure that gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load.

Debt Ratio = Total Debt (TD) Net Assets (NA)

Year  Debt Ratio

2005  0.56

2006  0.53

2007  0.54

2008  0.54

2009  0.55

The debt ratio of the year 2009 indicates that, for that very year, 55% of the firm’s net assets are financed by lenders and the remaining 45% by the owners.

2. Debt - Equity Ratio

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Debt-Equity ratio = Total Debt (TD) = Total Liabilities Net Worth (NW) Shareholder’s Equity

Year  Debt-Equity Ratio

2005  1.29

2006  1.14

2007  1.19

2008  1.18

2009  1.25

3. Coverage Ratio

A calculation of a company's ability to meet its interest payments on outstanding debt. It checks the firm’s debt servicing capacity. Also called Interest coverage ratio, it is equal to earnings before interest and taxes for a time period, often one year, divided by interest expenses for the same time period. The lower the interest coverage ratio, the larger the debt burden is on the company.

Interest Coverage = Earnings before Interest & Tax (EBIT) Interest

Year  Interest Coverage

2005  1.26

2006  2.13

2007  2.30

2008  2.13

2009  1.79

4. Activity Ratio

Accounting ratios that measure a firm's ability to convert different accounts within their balance sheets into cash or sales i.e. to evaluate the efficiency with which the firm manages and utilizes its assets.

a) Total Asset Turnover

The amount of sales generated for every rupee’s worth of assets.

Total Asset Turnover = Sales (Revenue) Total Assets

Year  Asset Turnover

2005  2.02

2006  1.61

2007  1.32

2008  1.22

2009  1.21

b) Fixed Asset Turnover

The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.

Fixed Asset Turnover = Sales Net Fixed Assets

Year Fixed Asset Turnover

2005  4.90

2006  6.05

2007  4.70

2008  4.21

2009  4.04

Pantaloon Retail India Limited required investments of 4.90, 6.05, 4.70, 4.21 & 4.04 in fixed assets for each of the years from 2005-09 respectively to generate a sale of 1Rs.

c) Current Asset Turnover

Current Assets Turnover ratio, shows the productivity of the company's current assets.

Current Asset Turnover = Sales Current Assets

Year  Current Asset Turnover

2005  2.68

2006  2.21

2007  1.85

2008  1.92

2009  1.93

Pantaloon Retail India Limited required investments of 2.68, 2.21, 1.85, 1.92 & 1.93 in current assets for each of the years from 2005-09 respectively to generate a sale of 1Rs.

Profitability Ratio

A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.

1. Gross Profit Margin

A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.

Gross Profit Margin = Gross Profit = Sales – Cost of Goods Sold Sales Sales

Year  Gross Profit Margin %

2005  35

2006  33

2007  32

2008  30

2009  30

2. Net Profit Margin

This number is an indication of how effective a company is at cost control. The higher the net profit margin is, the more effective the company is at converting revenue into actual profit.

Net Profit Margin = Net Profit (after tax) Sales

Year  Net Profit Margin %

2005  4

2006  4

2007  4

2008  2

2009  2

3. Return On Investment

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.

Return On Investment = Earnings Before Interest & Tax (EBIT) Total Assets

Year  Return On Investment%

2005  23.98

2006  17.44

2007  16.57

2008  10.59

2009  9.52

4. Dividend Per Share

The sum of declared dividends for every ordinary share issued. Dividend per share (DPS) is the total dividends paid out over an entire year (including interim dividends but not including special dividends) divided by the number of outstanding ordinary shares issued.

Dividend Per Share = Earnings Paid To Shareholders No of Ordinary Shares Outstanding

5. Dividend Payout Ratio

The percentage of earnings paid to shareholders in dividends. The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio.

Dividend Payout Ratio = Dividends per Share (DPS) Earnings per Share (EPS)Working Capital

A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as:

Working Capital = Current Assets – Current Liabilities

Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory).

Also known as "net working capital", or the "working capital ratio".

If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.

Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.

Year

 Working Capital (Rs in Crores)

2005  259.05

2006  620.09

2007  1389.86

2008  1990.91

2009  2370.89

EBIT

An indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest. EBIT is also referred to as "operating earnings", "operating profit" and "operating income”. Also known as Profit Before Interest & Taxes (PBIT), and equals Net Income with interest and taxes added back to it.

In other words, EBIT is all profits before taking into account interest payments and income taxes. An important factor contributing to the widespread use of EBIT is the way in which it nulls the effects of the different capital structures and tax rates used by different companies.

EBIT = Revenue – Operating Expenses

Year EBIT (Rs in Crores)

2005  93.91

2006  149.64

2007  307.63

2008  464.28

2009  674.50

The constant rise indicates proper working capital management and efficient production system enabled with minimum of expenditure.

Break Even Analysis

The break-even point for a product is the point where total revenue received equals the total costs associated with the sale of the product. A break-even point is typically calculated in order for businesses to determine if it would be profitable to sell a proposed product, as opposed to attempting to modify an existing product instead so it can be made lucrative.

Break even analysis can also be used to analyze the potential profitability of an expenditure in a sales-based business.

BEP (units) = Total Fixed Cost Selling Price – Variable Cost/unit

BEP (rupees) = Total Fixed Cost P/V RatioP/V Ratio = Contribution Sales

Contribution = Sales – Variable Cost = Fixed Cost + Profit

*Note* Cost of Goods Consumed & Sold and Personnel cost are assumed to be variable. Manufacturing & other expenses, Finance Charges and Depreciation are assumed

to be fixed.

Year  Fixed Cost Variable Cost

2005  250.73  750.78

2006  423.38  1355.93

2007  732.49  2410.38

2008  1070.41  3786.54

2009  1427.34 4679.56

Year  P/V RatioBEP (Rs in Crores)

2005 0.3269  766.7638

2006  0.305139  1386.253

2007  0.318912  2295.302

2008  0.30626  3493.765

2009 0.3191  4470.656

Accounting Rate of Return – ARR

Accounting rate of return or ARR is a financial ratio used in capital budgeting. The ratio does not take into account the concept of time value of money. ARR calculates the return, generated from net income of the proposed capital investment. The ARR is a percentage return.

If the ARR is equal to or greater than the required rate of return, the project is acceptable. If it is less than the desired rate, it should be rejected. When comparing investments, the higher the ARR, the more attractive the investment.

ARR = Average Income Average Investment

Year  ARR %

2005  33.08

2006  13.31

2007  13.2

2008  8.62

2009  6.65

EPS

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.

When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.

Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio.

Year  Earnings per share

2005  3.31

2006  5.06

2007  8.71

2008  7.54

2009  7.94

Net Present Value

NPV method is a classic economic method of evaluating the investment proposals.

Year  Profit (Rs in Cr)Present Value Factor at 10%

Net Present Value

Cumulative Net Present Value

2005  93.91  0.909  85.36  85.36

2006  149.64  0.826  123.04  208.4

2007  307.63  0.751  230.55  438.9

2008  464.28  0.683  316.91  755.8

2009  674.50  0.621  420.55  1176.4

Initial investment i.e. in 2005 was Rs. 520 Cr. Therefore the payback of the entire investment happened during the year 2007-08.

Hence the payback period 3.1years.

Capital Surplus

Year  Capital Surplus

(Rs in Cr)

2005  196.53

2006  500.02

2007  1,062.82

2008  1,751.50

2009  2,211.48

The data indicates that the capital surplus of Pantaloon Retail India Limited has increased throughout the last five years. This shows the firm is running profitably. So positive signs suggests the potential of the firm for more investment and expansion plans.

Conclusion

As the above data shows there was an increase in the earnings per share for the last 5 years for Pantaloon Retail India Limited. The only exceptional case was during the year 2007-2008. But immediately the next year, the firm bounced back with increase again. This data is sufficient to prove the success of the company and a profitable one too with the capital surplus and revenue profit seemed to be increasing year after year.