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Trent: A brief overview - Views on News from Equitymaster
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  • Jul 9, 2007

    Trent: A brief overview

    About the company
    Trent Limited commenced operations in 1998 with a single store under the brand name ‘Westside’, which specialised in apparels. Over the years, the company has increased its product offerings and has moved into products like footwear, cosmetics, perfumes, household accessories and gifts, all in the non-food segment. In the food segment, the company, in October 2004, launched its first store – ‘Star India Bazaar’ – in Ahmedabad. The 50,000 sq ft. store provides staple foods, beverages, health and beauty products, vegetables, fruits, dairy products, consumer electronics and household items. In 2005, it acquired Landmark, India's largest book and music retailer. In a recently signed deal, Trent has agreed to anchor 12 malls set up by DLF Universal Ltd across the country, at its Westside, Landmark and Star India Bazaar outlets. This amounts to about 27 locations, totalling to about a million square feet of space.

    A distinctive business model: The company operates in both value retailing (Star India Bazaar) as well as lifestyle retailing segments (Westside). Further it acquired 76% stake in Landmark, which is one of the largest books and music chains in India. Landmark operates nine stores in the major metros of the country.

    Westside: The retail property Westside (departmental store) caters to the shopping needs of customers. Currently, the company has set up nearly 27 stores across the country with each measuring 12,000 to 30,000 sq ft each. While apparels account for a huge chunk of the business, it also offers a wide range of home goods such as line, towels, crockery, home décor products etc. The company has lined up rapid expansion plans and intends to open 20 more stores by FY10.

    Star India Bazaar: The mass-market business of the company offers a huge number of products carrying a separate line of private labels at low prices. Star India Bazaar, the hypermarket launched in FY05, offers staples, food, perishables, beverages, cleaning aids, health & beauty, house ware, consumer durables and apparel with about 25,000 SKUs. Currently, the company offers private labels in food, non-food (cleaning aids), consumer durables, apparel, luggage and house ware. Going forward, the company intends to offer private labels in other categories also, as a part of its strategy. Volumes drive the growth of this business, as margins are wafer thin. However, the company has de-risked its margins by adopting a strategy to offer private or own labels that enjoy better margins. Trent, being an established player in the apparel retail segment, has off late entered into this segment and has earmarked huge expansion plans. To tap the growing market, the company plans to open 10 new stores by FY10.

    Features of the company
    Strength of its own labels: Trent brands its products with the same name and focuses on building in-store brands, that is, its own labels. 90% of the apparels sold at the store are made or procured as per Westside specifications and sold exclusively at Westside stores under the owned labels (Westside or sub-brands of Westside like SRC, Westsport, 2Fast4U, Richmond etc.). In general depending upon the brand, the retailers earn gross margins ranging from 25% to 40%, however, in case of private or own labels they (retailers) can enjoy 55% to 60% gross margins. The own labels also help control merchandising and supply chain costs and the required changes and modifications to suit the changing customer profile can be made much quicker. Further it provides more flexibility to the retailer in terms of pricing of the merchandise and helps control the stock of inventory in a better way. It also offers own labels in its mass-market business Star India Bazaar. Given the fact that this line of business has low margins, the company plans to focus on growing volumes and on private labels that have better margins.

    Expanding reach: At present the company operates 27 stores and has presence in 18 cities. In order to increase penetration and capitalise on the untapped potential, the company is opening 20 Westside stores and 10 Star India Bazaar stores going forward. With this the company will be able to cater to newer markets, which will lead to an increased customer base.

    Cash rich company: Trent maintained substantial cash balances until FY04 (cash + liquid investments of Rs 1.1 bn), bringing significant financial flexibility and generating substantial non-operating income. Post the opening of its first hypermarket, the company outlined huge expansion plans, which will be funded out of internal accruals. It had also issued 1.3 m partly convertible debentures with detachable warrants of Rs 900 in FY06 to fund its expansion plans, raising its total paid up capital from Rs 131 m to Rs 144 m.

    What to expect?
    Recently, the company entered into an agreement with The Xander Group Inc, a global private equity firm. The Xander Group Inc. will through one or more of its fund vehicles invest in the development of an institutional retail real estate portfolio in India in partnership with high quality Indian developers. The company would have anchor tenancy rights and obligations and would participate with Xander in the management of such portfolio and its growth. The company recently came up with a rights issue of 1: 5 to fund its expansion plans (plans to set up 30 new stores), upgradation and expansion of some of the existing stores over the next three years.

    At the current price of Rs 730, the stock is trading at a price to earnings multiple of 35.5 times its FY07 earnings (price to sales of 2.6 times). While the management has chalked out massive expansion plans, the execution risk remains a concern. More importantly, the industry is highly capital-intensive and is susceptible to fluctuations in consumer spending. Therefore, we advise investors to exercise caution.



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