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Trent: In a ‘festive’ mood! - Views on News from Equitymaster

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Trent: In a ‘festive’ mood!

Jan 21, 2006

Performance summary
Trent Limited, the Tata Group’s retailing arm declared its 3QFY06 results late yesterday. The company has posted robust performance for the quarter, with revenues and net profits growth by 36% YoY and 24% YoY respectively. For the nine-month period, while topline has grown by 50% YoY, bottomline is up 43% YoY. While operating margins have expanded for both the period under consideration, lower income from investments and higher tax liabilities has resulted in the contraction of net margins.

Financial performance
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net Sales 701 952 35.7% 1,711 2,558 49.5%
Expenditure 641 846 32.0% 1,582 2,299 45.3%
Operating Profit (EBDIT) 61 106 74.6% 129 259 101.1%
Operating Profit Margin (%) 8.6% 11.1%   7.5% 10.1%  
Other Income 16 12 -24.0% 69 56 -18.8%
Interest 0 3 - 0 6 -
Depreciation 14 20 45.8% 31 53 71.2%
Profit before Tax 62 94 50.7% 167 255 53.2%
Tax 10 30 182.7% 45 81 79.3%
Profit after Tax/(Loss) 52 64 24.0% 121 174 43.4%
Net profit margin (%) 7.4% 6.8%   7.1% 6.8%  
No. of Shares (m) 13.1 14.4   13.1 14.4  
Earnings per share (Rs)*         4.5  
P/E (x)*         217.8  
* On a trailing 12-months basis            

What is the company’s business?
Trent Limited commenced operations in 1998 with a single store under the brand name ‘Westside’, which specialized in apparels. Over the years, the company has increased its product offerings and has moved into products like footwear, cosmetics, perfumes, household accessories and gifts, all in the non-food segment. In the food segment, the company, in October 2004, launched its first store – ‘Star India Bazaar’ – in Ahmedabad. The store provides staple foods, beverages, health and beauty products, vegetables, fruits, dairy products, consumer electronics and household items.

What has driven performance in 3QFY06?
Festivities to the fore: The strong topline growth during 3QFY06 has largely been aided by the festive season, which by industry standards is considered to be the peak season for retailers. At the end of the quarter, the company had a total of 21 Westside stores and one star India Bazaar hypermarket store. Trent has indicated that the second Star India Bazaar store is due to open before the end of FY06. Apart from that, it has bought a 76% stake in Landmark, which is into the business of selling books, music, stationery, toys and greeting cards. Landmark has 4 stores – 3 in Chennai and one in Bangalore. This move by Trent would make it a one-stop shop, as it would be providing more product lines to its customers by way of this acquisition.

Cost table
as a % of net sales 3QFY05 3QFY06 9mFY05 9mFY06
Cost of goods sold 48.1% 49.2% 48.0% 49.5%
Staff cost 5.5% 5.5% 6.2% 5.6%
Advertisement & promotion 12.6% 9.5% 10.5% 9.7%
Other expenditure 25.2% 24.8% 27.7% 25.2%
Total expenditure 43.3% 39.7% 44.4% 40.4%

Lower ad expenses aid margins: Trent’s advertising expenses declined from 12.6% of 3QFY05 sales to 9.5% of 3QFY06 sales, thereby acting as the booster to operating margins during the quarter. But for a marginal rise in cost of goods sold, the margin profile would have been much better.

It boils to the bottomline: Robust growth in topline combined with expansion in operating margins, has helped Trent post a superlative growth in net profits for both the periods under consideration. But for the lower other income and sharp rise in tax liabilities, the bottomline growth would have been higher still.

What to Expect?
At the current price of Rs 970, the stock is trading at a price to earnings multiple of 57.5 times trailing 12-months earnings. The valuations continue to be at the upper end of the spectrum. Trent has indicated that it is looking at increasing its product offering with the purchase of ‘Landmark’ and setting up the next hypermarket in Bangalore. These initiatives would not only make the company a one-stop shop for almost all consumer needs, but would also help it in increasing its revenue and margin visibility. Stiff competition is expected in this format of retailing, as many established international players like Wal-Mart (US), Shoprite (South Africa) and Spar (Europe) are making their foray into the Indian territories. However, in our view, although retailing has high growth prospects, considering premium valuations, the risk reward ratio is unfavorable from the short to medium term perspective.

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