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Trent: Ramping up stores, but…
Feb 12, 2009

Performance summary
  • Topline declines by 12% YoY during 3QFY09. Slowing economic growth impacts growth of retail sector.
  • Lower inventory and lower advertisement expenses lessen overall operational costs. The same helped the company expand EBITDA margins by 0.4% YoY in 3QFY09.
  • Despite nearly six-fold growth in operating income, net profits decline by 42% YoY in 3QFY09 on account of higher depreciation charges, tax outgo and lower other income.
  • The company has opened 4 Westside stores and the first Fashion Yatra store during the quarter taking the total number of Westside stores to 36 and the total number of stores under various formats to 42.
  • With effect from 1st August, 2008 the company has transferred its Star Bazaar business as a going concern to its 100% subsidiary Trent Hypermarket Ltd. Hence, performance is not truly comparable on year on year basis.


Financial performance snapshot

(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 1,397 1,230 -11.9% 3,713 3,819 2.9%
Expenditure 1,396 1,223 -12.4% 3,631 3,890 7.1%
Operating profit (EBDITA) 1 7 571.2% 82 (71)  
EBDITA margin (%) 0.1% 0.5%   2.2% -1.9%  
Other income 130 105 -19.0% 307 375 22.2%
Interest 3 3 -0.2% 10 10 0.1%
Depreciation & amortisation 26 30 15.6% 62 78 26.9%
Profit before tax 101 78 -22.7% 317 216 -31.8%
Tax (1) 20 -2422.7% 46 40 -12.6%
Profit after tax 102 59 -42.4% 271 176 -35.0%
Net profit margin (%) 7.3% 4.8%   7.3% 4.6%  
No. of shares (m)       19 20  
Diluted earnings per share (Rs)*         12.0  
P/E (x)         25.8  
(*trailing twelve month earnings)

What has driven performance in 3QFY09?
  • Trent Ltd has reported lower topline growth of 12% YoY during 3QFY09. While the exact reason for the same is not known, it can be attributed to economic slowdown and closure of one store due to fire in the mall where the store was located. The store was not operational during the quarter. The company also witnessed lower footfalls during the quarter on account of terror attacks witnessed in Mumbai in November 2008. Thus, despite being a festive season, gloomy economic conditions triggered a cautious approach towards spending and this hurt the retail industry’s growth rate.

    Cost break-up
    (% of sales) 3QFY08 3QFY09 9mFY08 9mFY09
    Raw materials consumed 51.4% 47.3% 51.8% 51.1%
    Staff cost 7.1% 8.5% 7.3% 8.3%
    Advertising 12.4% 9.9% 10.0% 9.4%
    Other expenses 29.1% 33.8% 28.7% 33.1%

  • The company has grown its operating profits nearly six-fold during the 3QFY09. The same has been the result of control on inventory levels and advertising expenses. As the company was able to contain major cost heads as a percentage of sales, increase in staff cost and other expenses had no material impact.

  • Despite reporting whopping growth at operating level, the bottomline dropped by 42% YoY in 3QFY09. Lower other income, higher depreciation charges and higher tax outgo caused the damage. The profit before tax (PBT) also declined by 22% YoY. If one excludes the other income, the company has reported loss of Rs 27 m before adjusting for tax outgo.

What to expect?
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 square feet basis will be the most important factor to watch out for in the future. The margins are expected to remain under pressure in the medium term. However, with increased scale of operation, economies of scale should result in margin expansion over a period of time.

At the current price of Rs 308, the stock is trading at a price to earnings multiple of 25.8 its trailing twelve month earnings. Although the company is scaling up its retail space, the same may not be able to boost earnings in the near to medium term. Economic slowdown is likely to continue to impact footfalls and hence volume offtakes. Considering the economic scenario and the company’s dependence on income other than retailing business, investors should practice caution.

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