The retailing arm of the Tata Group, Trent Limited, has seen its stock price jump sharply (by over 50%) in the last one month. Market circles were rife with rumours that 'Shopper's Stop', a private retailing group, has managed to privately place some part of its equity at a substantial premium. However, the truth is that the Tata Group is looking at hiking its stake in the company. This seems to have put the spotlight on Trent, which is one of the few listed retail chains in India.
Instead of looking at the 'premium private placement' or the 'stake hike' angles let's evaluate the company's recent performance and its prospects. Trent has done well in the December quarter. Its turnover was up over 64% YoY during the quarter. Retail sales forming part of net sales increased by 71% YoY. Increased level of activity of the retail business has resulted in the business posting a profit for the first time in the December quarter, which is a good sign. However, its net profit declined YoY by nearly 26% owing to lower other income earned. The total profit of the company during this period declined due to substantial reduction in treasury income arising from a drop in interest rates and dividend receipts.
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On a consolidated nine month basis, the company clocked a significant 54% growth in turnover, but finished the April-December period with a 30% decline in net profits. A 33% drop in other income, as well as expenses increasing at a faster clip than sales was largely responsible for the decline in profitability.
The company's staff cost has increased by 22% YoY and its raw material costs by 66% during April-December 2001. While the rise in expenditure is sure a dampener on profits in the short term, it also signifies the level of the management's commitment to expand the business. The faster escalation in expenditure is the cost the company is paying for rapid expansion. Also, the downturn seems to have forced the Trent management to offer discounts etc. in order to generate volumes, thereby putting pressure on realisations.
Going by its performance, Trent is likely to benefit from any upturn in the economic activity, which would further add to its topline and hopefully, at that time the company can keep its costs under control. At the current market price of Rs 112 the stock is trading at nearly 15x annualised 9m FY02 earnings. The valuations are on the higher side in view of the company's current profitability, and therefore could see weakeness in the short term. However, in the long run, the management's focus on the retailing business is likely to improve the company's earnings, and if it does then Trent's valuation matrix will automatically strengthen.
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