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Trent Ltd: Research meet extracts - Views on News from Equitymaster

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Trent Ltd: Research meet extracts

Jun 18, 2008

We recently met the management of Trent Ltd. to understand the prospects of the Indian retailing sector in general and the company’s strategy to withstand competition and its expansion plans in particular. Here are the extracts of the meeting. A brief about the company
Trent Ltd., a Tata Group company, is one of the oldest retail players with presence in lifestyle and value retailing business. The company operates in three formats namely Westside, Star India Bazaar and Landmark. It also acts as a franchisee to the Benetton group to market Sisley brand. During the period FY03 to FY07, the company has grown its sales and profits at compounded annual rates of 44% and 19% respectively.

  • Also read - How to identify a retailing stock?

    Extracts of the meeting
    Lifestyle retailing business:
    Trent caters to the high-margin, low-volume lifestyle retailing business through two formats – Westside and Landmark. The latter is a 74% subsidiary of Trent.

    • Westside stores: Westside, which offers range of apparels across age groups (primarily concentrates on owned labels), has a count of 30 stores currently. The average store size is about 20,000 sq. feet. The company owned labels that form 80% of the brand mix have enabled Trent to earn better profitability than its peers (mainly Shoppers’ Stop). Trent has not been as aggressive as its peers in its expansion plans in the past. However, understanding the importance of scale to survive and make most of the opportunity in the buoyant retail sector, the company has geared up to the challenge. It plans to roll out, including the pipeline stores or delayed plans, 14 stores in the current fiscal. The company further expects store count to grow at the rate of average 15% per annum over the next three to four years. To set up a Westside store of an average size of 20,000 sq feet, Trent has to incur capital expenditure of around Rs 25 m, which works out to Rs 1,250 per sq feet.

      As mentioned earlier, Trent has been a laggard in aggressively expanding its store presence as compared to its peers. However, the strategy seems to have worked in the company’s favour as rentals have zoomed upwards over the past two to three years. The rising rentals have been taking toll on the retailers’ margins. Though the company contracted properties in the recent past, it has moved steadily with its expansion plans and is not willing to settle down for unviable rentals to achieve scale. On account of the strong brand name and being a part of the Tata group company that has earned a name for quality, Trent has been able to sign up properties at an average rental of Rs 80 to 90 per sq ft. Though, it is slightly on a higher side as compared to its peer in the lifestyle retail segment Shoppers’ Stop, who has been able to lock properties at Rs 75 per sq. feet.

      In the recent past, the company has not increased price points to boost sales and has been charting a volume driven growth strategy. Going forward too, the company targets to push up the topline on the back of increase in volumes, that shall come in on account of growth in same store sales as also due to new store openings.

    • Landmark stores: The volume game does not apply only in case of sales and operational costs but also in case of fixed cost such as property. The Landmark store, a 74% subsidiary of Trent is spread across average sq. feet of 25,000, and offers books, music, toys and crockery. Around 70% of its product mix consists of books that are mainly sourced on consignment basis. Thus, the risk of loss is minimised to that extent as the company does not have to bear the loss of unsold books. However, this is a very niche market and is not a fast moving cash rich business.

      Now one may argue as to what makes the company have a presence in such a niche business segment with thin volumes and elastic prices, as also with publishers have bargaining power. The company sees huge potential in this line of segment and expects growth to pick up momentum as consumers move up the value chain. With increasing income levels, high aspiration levels and changing consumption patterns, the company expects its music and gaming business to expand. The average set up cost of the store is Rs 40 m and the company has planned add 5 to 6 net stores in this fiscal, over the existing count of 10 stores.

    • Star India Bazaar: This hypermarket that falls into the value retailing category is in a testing phase for Trent. Accordingly, the company is gradual in moving ahead with its expansion plans. Currently the store count stands at 3 and is expected to grow almost in line with its lifestyle segment clocking an increase of 10% to 15% per annum. Considering that value retailing is a low-margin, high-volume business, net margins hover in the range of 3% to 4%. The format is targeting monthly purchases rather than daily purchases. Apart from food and grocery that account for almost 60% of the product mix, the format also offers apparels, personal care products and consumer durables. In case of any retail venture, especially hypermarkets, location is the key to success. After studying the consumption patters of consumers, Trent plans to roll out stores that cover 50,000 to 60,000 sq feet of space with an average capex of Rs 50 m per store.

    • Also read – Outlook on the retail sector

    The way forward: Considering the expansion plans outlined by the company and the average capex required per format on per store basis, the total investment required during the current fiscal would range between Rs 650 m to Rs 700 m. Considering that the company is sitting on a huge cash balance, the incremental funding cost is expected to be met entirely through internal accruals. We also believe that given the business model of the company, which is skewed towards lifestyle retailing, the current margins seem sustainable in the medium to long term. As for the risks, the management has indicated that a prolonged economic slowdown is what can impact its growth in the future. However, as aspiring individuals are getting added to the earners’ category and with the change in the economic cycle, the sector will find takers over the long run. At the current price of Rs 491, the stock is trading at a multiple of 25 times the company’s trailing 12 months earnings. Trent’s full year results are scheduled to be announced by the end of this month. We shall update our research report on the company thereafter.

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