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Trent: Pricier growth - Views on News from Equitymaster

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Trent: Pricier growth
Aug 4, 2008

Performance summary
  • Topline grows by 10.9% YoY on the back of a muted growth in volumes.
  • Scaling cost of operation nearly eats into the profits. Operating margins contract by 6.6% YoY in 1QFY09.
  • While operating profits head southwards (down 90% YoY), net profits had marginal growth of 5.6% YoY in 1QFY09 on the back of higher other income.
  • If one excludes the other income, then the company bleeds at the net level (down 170% YoY).


Financial performance snapshot
(Rs m) 1QFY08 1QFY09 Change
Net sales 1,203 1,334 10.9%
Expenditure 1,115 1,325 18.8%
Operating profit (EBDITA) 88 9 -89.7%
EBDITA margin (%) 7.3% 0.7%  
Other income 34 113 237.8%
Interest 3 3 0.4%
Depreciation & amortisation 15 23 54.7%
Profit before tax 104 96 -7.0%
Tax 26 14 -45.2%
Profit after tax 78 82 5.6%
Net profit margin (%) 6.5% 6.2%  
No. of shares (m) 16 20  
Diluted earnings per share (Rs)*   17.0  
P/E (x)   28.0  
* trailing 12-months

What has driven performance in 1QFY09?
  • The overall discretionary spending continues to be impacted by inflationary situation in the economy, owing to which the retail major has reported muted 11% YoY growth in topline. 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. During 1QFY09, the company opened two Westside and two Sisley taking the total store count to 40 stores.

    Cost break-up
    ( % of net sales) 1QFY08 1QFY09
    Consumption of raw materials 2.2% -10.3%
    Staff cost 7.6% 8.7%
    Advertising and sales promotion expenses 8.0% 7.9%
    Purchase of finished products 48.4% 61.6%
    Other expenditure 26.5% 31.4%

  • The scaling cost of operation nearly eats into the company’s operating profits. The EBITDA margins have been pressurised by the rising employee cost and the purchase of finished products. The expenses have increased on two counts, firstly on account of expansion plans and secondly due to the general increase in cost of operation with the rise in inflation. Further, the intensifying competition does not allow the company to increase its price points and forces it to compromise its margins due to the competitive environment.

  • The company expects its store count to grow at the rate of 15% to 20% per annum. Considering the low penetration levels of organised retail and the changing attitude of Indian consumers towards modern retailing, there is lot of scope to grow. However, in the medium term the margins are expected to be pressurized. The improvement in margins will be brought in by economies of scale.

  • While operating profits declined by almost 90% YoY, net profits reported scanty growth of 5.6% YoY in 1QFY09 on the back of higher other income. More than three-fold growth in other income has primarily come in on account of the surplus cash that remained unutilised out of the proceeds of the preferential issue of equity shares and rights issue, invested by the company in mutual funds.

  • If one excludes the other income then the company has actually reported losses. The net profits have declined by nearly 170% YoY mainly on account of poor show at the operating level coupled with increase in replacement cost and finance charges, which has been the result of expansion plans carried out by the company.

What to expect?
At the current price of Rs 477, the stock is trading at a price to earnings multiple of 23 times our estimated FY11 earnings. The margins are expected to remain under pressure in the medium term. However, with increased scale of operation economies of scale will result in margin expansion over a period of time. 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. We shall soon update our research report on the company.

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