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Trent Ltd: Inflation pinch... - Views on News from Equitymaster

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Trent Ltd: Inflation pinch...

Jul 2, 2008

Performance summary
  • Topline grows by 13% YoY on the back of a strong momentum in store expansion.
  • Operating margins contract by 4.4% in FY08 as costs grow at a faster pace compared to topline growth.

  • While operating profits declined by almost 55% YoY, net profits reported marginal growth of 1.4% YoY in FY08 on the back of higher other income.

  • The company expects its store count (36 in FY08) to grow at the rate of 15% to 20% in the next two to three years.

  • The board has recommended dividend of Rs 7 per share (dividend yield of 1.6%).

Financial performance snapshot
(Rs m) FY07 FY08 Change
Net sales 4,558 5,142 12.8%
Expenditure 4,221 4,989 18.2%
Operating profit (EBDITA) 337 152 -54.8%
EBDITA margin (%) 7.4% 3.0%
Other income 166 323 94.0%
Interest 14 13 -6.9%
Depreciation & amortisation 79 89 11.9%
Profit before tax 410 373 -8.9%
Tax 86 45 -48.0%
Profit after tax 324 329 1.4%
Net profit margin (%) 7.1% 6.4%
No. of shares (m) 16 20
Diluted earnings per share (Rs)* 16.8
P/E (x) 25.9
* trailing 12-months

The company has not declared the fourth quarter numbers and hence we have not mentioned the same.

What has driven performance in FY08?
  • For the full year, the company has reported 13% YoY growth in topline on account of new store openings. During the year, the company opened 9 stores (Westside, Sisley and Star Bazaar) stores taking the total store count to 36 stores. The topline growth in FY08, however, when compared to that in FY07 (32% YoY) is relatively muted. The companyís business is driven by discretionary spending. The same seems to have been curtailed by the Indian consumers with rising inflation.

  • Trentís growth over the years has been muted compared to the orgainsed retail industry, which has grown at the rate of 30% annually. Apart from the low conversions (footfalls converted into cash memos i.e. actual purchases) witnessed in the second half of the FY08, what has impacted the full year performance is the marginal decline in topline in 2QFY08. Had the company not witnessed marginal decline in topline during 2QFY08, the full year performance would have been better.

    Cost break-up
    (a % of net sales) FY07 FY08
    (Increase)/Decrease stock in trade -4.3% -1.1%
    Consumption of raw materials 0.5% 0.5%
    Staff cost 6.2% 7.1%
    Advertising and sales promotion expenses 55.9% 53.0%
    Other expenditure 8.4% 8.0%
    Purchase of finished products 25.9% 29.5%

  • The operating profits declined by almost 55% YoY as costs grew at a faster pace compared to topline growth. The EBITDA margins have been pressurised by the rising employee cost and the purchase of finished products. In terms of percentage of sales basis, these costs are expected to hover around the same levels on account of expansion plans outlined by the company. The company expects its store count to grow at the rate of 15% to 20% in the next two to three years. Considering the low penetration levels of organised retail and the changing attitude of Indian consumer towards modern retailing, there is scope for growth. However, in the medium term, the margins are expected to remain sub-optimal, as the company will incur capex for its new stores and will not be able to improve margins during inflationary times. The performance is expected to improve gradually over a period of time as economies of scale set in.

  • While operating profits declined by almost 55% YoY, net profits reported marginal growth of 1.4% YoY in FY08 on the back of higher other income. If one excludes other income then the corporate costs such as finance charges, depreciation costs and tax outgo almost eats into the profits.

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 sq feet basis will be the most important factor to watch out for in the future. As for the risks, the management has indicated that a prolonged economic slowdown is what can impact its growth in the future.

At the current price of Rs 436, the stock is trading at a price to earnings multiple of 13.2 times our estimated FY10 earnings. We shall soon update our research report on the company.

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Mar 26, 2019 (Close)


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