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Trent: Mixed show - Views on News from Equitymaster
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Trent: Mixed show
Jan 23, 2008

Performance summary
  • Topline grew by 18% YoY backed by the festive season.
  • Operating margins have declined sharply owing to expansion plan resulting into heavy spend on advertisement expenses and hike in employee cost.

  • Net margins squeezed marginally compared to EBITDA margins as higher other income provided cushion to declining net profits.

  • If one excludes other income then the net profits have declined by 77% YoY.

Financial performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 1,218 1,442 18.3% 3,472 3,853 11.0%
Expenditure 1,099 1,396 27.1% 3,175 3,631 14.4%
Operating profit (EBDITA) 120 46 -61.7% 297 221 -25.6%
EBDITA margin (%) 9.8% 3.2%   8.6% 5.7%  
Other income 32 85 167.5% 107 167 56.2%
Interest 3 3 0.0% 10 10 -4.9%
Depreciation & amortisation 16 26 66.4% 56 62 10.8%
Profit before tax 132 101 -23.5% 338 317 -6.3%
Tax 25 (1) -103.3% 85 46 -46.3%
Profit after tax 107 102 -4.7% 253 271 7.2%
Net profit margin (%) 8.8% 7.1%   7.3% 7.0%  
No. of shares (m)       16 19  
Diluted earnings per share (Rs)*         19.4  
P/E (x)         29.9  
             
* trailing 12-months

What has driven performance in 3QFY08?
  • The second half of the financial year is the peak season for the retailers owing to festive season. Further, Trent has adopted a strategy to establish the Westside brand in all large towns with a population of over one lakh. The continuous opening of new stores in order to increase penetration has aided the company's topline growth, which grew by 18% in 3QFY08 as compared to the same period last year. Going forward, the topline growth will be driven by the companyís huge expansion plans (additional 30 stores including Star India Bazaar).

  • While the momentum in store expansion is aiding revenue growth, it is pressuring EBITDA margins, which have contracted by 6.6% in 3QFY08. As the company expands and opens new stores it will be need of more sales and administration personnel. The margin pressure is thus expected to continue in the medium term as staff costs are expected to be on the higher side. The higher advertisement expenses have also exerted pressure on operating margins. This could be attributed to the fact that the competition is intensifying and the need to push the customer to the store to account larger share of his (customerís) wallet.

  • There is immense potential in this sector on account of lower base and change in attitude and lifestyle. Consumption has been driving economic growth in recent past and is expected to continue. The company, still being in its early stages of operation and hence being in expansion mode, will take time before its profitability stabilises.

    Cost break-up
    (a % of net sales) 3QFY07 3QFY08 9mFY07 9mFY08
    (Increase)/Decrease stock in trade 0.8% -3.3% -6.3% -1.2%
    Consumption of raw materials 0.5% 0.4% 0.5% 0.4%
    Staff cost 5.8% 6.8% 6.1% 7.0%
    Advertising and sales promotion expenses 9.1% 12.0% 9.3% 9.7%
    Other expenditure 50.2% 52.7% 56.8% 50.8%
    Purchase of finished products 23.8% 28.2% 24.9% 27.6%

  • The effect of strained EBITDA margins is reflected at the net level also. However, despite higher depreciation net margins contracted by merely 1.7% compared to 6.6% contraction in operating margins owing to higher other income and lower tax outgo. If one excludes other income then the net profits have declined by 77% YoY.

What to expect?
At the current price of Rs 580, the stock is trading at a price to earnings multiple of 15 times our estimated FY10 earnings. Given the fact that the management is focused on the strategy of setting up new stores and is looking at other related retail initiatives, the long-term growth prospects of the company look promising. The timely delivery of the agreed retail space by builders and the roll out of retail space to maximize efficiencies on a per sq feet basis will be the most important factor to watch out for in the future. Any adverse developments on this front will have a direct impact on the store rollout in the future, blocking capital and in turn impacting returns to shareholders.

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