Delays in opening the retail sector to foreign direct investment, rising interest burden and a looming economic slowdown bode ill for Pantaloon Retail, flagship venture of the Kishore Biyani-owned Future Group. Saddled with R4,200 crore debt at the end of June 2011, the company?s debt-equity ratio has touched 1.3:1, a level not seen at other retailing peers. Pantaloon, which saw such debt levels in the fiscal ending June 2009 ? when the financial crisis forced discount retailer Subhiksha Trading to shut shop ? had since brought it down to 1:1.

Though Future Group plans to trim its rising debt-equity ratio by selling its stake in non-core businesses like Future Capital, analysts say any slowdown in the economy could spark trouble. Biyani is already on record saying opening the sector to FDI will ?enable us to sell stakes to foreign retailers and make ourselves debt free?. An inter-ministerial panel recently recommended allowing 51% FDI in multi-brand retail, which must still be cleared by the Union Cabinet.

Jagannadham Thunuguntla, head of research at broking firm SMC Global, said Pantaloon?s debt is manageable if the economy continues to grow at the current pace. India?s GDP is expected to grow at 8.2% this fiscal, slightly below last fiscal?s 8.5%. ?As long as business is good, debt doesn?t seem to be a burden,? he said. ?It?s only when there is a slowdown that debt becomes a major burden.?

Some analysts fear the euro zone crisis and the US debt downgrade may cause some global volatility and that might impact consumer confidence in India.

?Retailers will face problems if GDP growth slows further and the consumption cycle slows,? Thunuguntla said. ?Then, the debt is a burden?. If consumer mood darkens, Pantaloon?s inventory of R3,500 crore could swell further as more stuff remain unsold.

The Reserve Bank of India?s policy of taming inflation with serial rate hikes is not helping either. ?Pantaloon?s debt could continue to reel under pressure as another rate hike seems imminent,? said Sangeeta Tripathi, an analyst covering the retail sector for broking firm Sharekhan. Tripathi terms Pantaloon’s debt ?alarming?, saying any debt-equity ratio above 1:1 is problematic. She said Pantaloon is the only major retailer sitting on such levels of debt. ?Titan and Jubilant don?t have debt; Shoppers Stop has some debt, but it is negligible,? she added.

Pantaloon said last week that it plans to sell stake in its financial services arm Future Capital Holdings. Foreign PE firms including Kohlberg Kravis Roberts (KKR) and JPMorgan are seen as potential buyers.

Analysts say it?s time Pantaloon reduced its debt, since rising interest outgo has started eroding profits. Interest payments last fiscal were R391 crore, rising nearly 10% to R428 crore this fiscal. Gautam Duggad, an analyst tracking Pantaloon for broking firm Prabhudas Lilladher projects payout to rise to R510 crore and R601 crore this fiscal and next, respectively. ?Assuming status quo, it will shoot up,? said Duggad.

The impact is already seen in its fourth quarter standalone results. While sales jumped 15% to R2,494 crore and Ebitda was up 22%, net profits rose a mere 2% compared with the same period last year.

However, Prabhudas Lilladher is bullish on the company?s stock and projects Pantaloon?s shares to trade around R337 in the next one year. The stock closed up 1% at R302 on the Bombay Stock Exchange on Monday.