Stock Review: Koutons Retail India

 

 

DELHI-BASED Koutons Retail India has lost over 40% of its market capitalisation in the past five trading sessions. Its stock closed at an all-time low on Thursday. Investors are deserting the counter following reports that the garment maker was unable to repay its loan to one of its lenders. Subsequently, credit rating agency ICRA suspended the ratings assigned to Koutons' 300-crore fund based facilities as the company failed to produce the requisite financial information.

In the past few years, the growth of companies in the retail sector has been hampered due to their heavy financial burden, which has squeezed their net profit margins. Earlier, most of these companies had adopted a strategy of expanding operations on borrowed funds hoping that the better future operating cash flows could help service debt. However, the strategy seems to have gone awry mainly because many of the retail players could not take advantage of consumption-led growth. The growth in borrowings far outpaced the rate at which their profits have risen.

Retail players including Vishal Retail and Subhiksha have struggled to cope up with their debt pile up against the backdrop of sluggish profits. Koutons Retail is another such case.

The company's debt trebled to 624 crore in the two years ended March 2009. Although Koutons has yet not published its FY10 balance sheet numbers, industry trackers say that the debt may be over 1,300 crore. During the past three fiscal years, its debt rose six fold while its net profit went up by just 2.4 times.
In the June quarter, after paying interest of 23.4 crore, the company managed to make a net profit of only 5.5 crore. Besides this, rising inventory, which compelled the company to offer its products at discounted rates, has put pressure on its margins. Its net profit margin has fallen to 6.7% from 8.5% in the past three fiscal years. Its debt to equity works out to be 2.6 while it is less than 0.3 for companies like Provogue (India) and Zodiac Clothing.

On the valuation front, the company is currently trading at a price-earning multiple of 6.9. Its other listed peers such as Provogue and Zodiac are trading at P/E multiples of 25 and 21. The premium valuations enjoyed by the latter two can be attributed to their sound fundamentals.

More clarity on Koutons would be available once it declares its latest audited annual numbers. However, even if the company manages to sail through the tough times, high debt and inventory on its books would continue to be a major concern.