Trent: Lower sales push aids margins - Views on News from Equitymaster

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Trent: Lower sales push aids margins

Jul 30, 2010

Trent has announced its 1QFY11 results. The company has reported a 33% YoY and 57% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline increases by 33% YoY in 1QFY11.
  • EBITDA margin expands from 3.1% in 1QFY10 to 6.4% in 1QFY11 on the back of lower advertising and sales promotion.
  • Other income grows by 4% YoY during 1QFY11.
  • Interest costs grow nearly five-fold during the quarter.
  • Bottomline grows by 57% YoY during 1QFY11 on the back of higher turnover and better operating margins.

Standalone financial snapshot
(Rs m) 1QFY10 1QFY11 Change
Net sales 1,223 1,622 32.6%
Expenditure 1,185 1,519 28.2%
Operating profit (EBDITA) 38 103 168.8%
EBDITA margin (%) 3.1% 6.4%  
Other income 66 69 3.8%
Interest 5 24 367.9%
Depreciation 22 29 32.2%
Profit before tax 78 119 53.3%
Tax 26 39 47.0%
Profit after tax/(loss) 51 80 56.6%
Net profit margin (%) 4.2% 4.9%  
No. of shares (m)   20  
Diluted earnings per share (Rs)*   21.5  
Price to earnings ratio (x)*   42.5  
*On trailing twelve months earnings

What has driven performance in 1QFY11?
  • Trent recorded a topline growth of 33% YoY during 1QFY11. The company has amalgamated Satnam Developers and Finance Pvt. Ltd. (SDPL) and Satnam Realtors Pvt. Ltd. (SRPL) effective 12th March, 2010. Accordingly, the 1QFY11 results of the company include figures of SDPL and SRPL and hence are not comparable with 1QFY10 results.

  • The company opened 3 Westside stores during 1QFY11 taking the total number of Westside stores to 46 and the total number of stores under various formats (Westside, Sisley and Fashion Yatra) to 54.

  • During 1QFY11, EBITDA margins expanded mainly on account of lower advertising and sales promotion which fell by 3% YoY (as a percentage of sales).

    Cost break-up
    (Rs m) 1QFY10 1QFY11 Change
    Raw materials 551 729 32.4%
    % sales 45.1% 45.0%  
    Staff cost 90 129 43.8%
    % sales 7.3% 8.0%  
    Advertising & sales promotion 110 100 -8.8%
    % sales 9.0% 6.2%  
    Other expenditure 434 560 29.2%
    % sales 35.5% 34.5%  
    Total cost 1,185 1,519 28.2%
    % sales 96.9% 93.6%  

  • Other income grew by 4% YoY during 1QFY11 while interest costs grew nearly five-fold during the quarter.

  • The company proposes to issue cumulative compulsorily convertible preference shares on a rights basis to its existing equity shareholders and has filed a letter of offer for the same.

What to expect?
At the current price of Rs 913, the stock trades at a multiple of 43 times its trailing twelve month earnings. Given that the management is focused on setting up new stores and is looking at similar retail initiatives, the long-term growth prospects of the company looks promising. However, itís a rough road and there is a long way to go. The companyís business model is skewed towards lifestyle retailing, where traction comes in slower as compared to the value retailing business. Moreover, discretionary spending is the first one to take a hit in times of economic downturn.

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