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Trent: Operational worries return - Views on News from Equitymaster
 
 
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  • Aug 5, 2002

    Trent: Operational worries return

    The Tata Group retailing arm, Trent Limited, declared its June quarter results recently. The company reported a 13% growth in topline and a significant three fold jump in bottomline during the quarter. The bottomline growth was aided by interest on tax refund and a tax write back of earlier years.

    (Rs m) 1QFY02 1QFY03 Change
    Net Sales 175 198 13.2%
    Other Income 11 50 345.8%
    Expenditure 156 207 32.4%
    Operating Profit (EBDIT) 18 -9 -150.4%
    Operating Profit Margin (%) 10.5% -4.7%  
    Interest 0 0 -
    Depreciation 6 6 7.6%
    Profit before Tax 24 34 44.7%
    Tax 1 11 987.5%
    Prior period items 0 69 -
    Profit after Tax/(Loss) 23 93 310.7%
    Net profit margin (%) 12.9% 46.8%  
    No. of Shares (eoy) (m) 13.1 13.1  
    Diluted Earnings per share* 6.9 28.2  
    *(annualised)      
    Current P/e ratio   5.0  

    At the operational level, though topline in value terms saw growth of 13%, in volume terms Trent registered a 25% growth in retail sales. This points to a sharp decline in realisations YoY due to adverse market conditions. The company was not able to cut costs in line with the fall in realisations and consequently, reported an operating loss.

    Had it not been for the interest on income tax refund (Rs 38 m) and the write back of tax provisions of earlier years (Rs 69 m), Trent would have finished 1QFY03 with a Rs 15 m net loss. This performance has broken the wave of optimism generated post the company's FY02 results. The company had finished FY02 with a 67% growth in topline and had earned 8.3% as operating margins. The performance was a welcome change from the past, when Trent declared operating losses and relied on higher other income to bail it out. June quarter results of the company have again signalled the company's fall back on other income support, which is worrying.

    Cost break-up
    (Rs m) 1QFY02 1QFY03 Change
    Material costs -1 -13 957.6%
    Purchase of finished goods 66 102 55.4%
    Staff costs 17 22 33.3%
    Other expenditure 75 96 27.8%
    Total expenditure 156 207 32.4%

    The June quarter is normally lacklustre for retailing business. It is the third quarter (i.e. the festival season) that is the best quarter for Trent. However, there is no doubt that the company is facing difficult market conditions and has had to resort to discounts to perk up volumes. This is probably the reason why Trent's expenditure has grown at a faster clip than its sales.

    Trent plans to take its tally of 'Westside' stores to 20 in the next three years. This will aid the company's topline growth in the future and help it attain a critical mass. Higher topline is likely to give it economies of scale and help it control its expenditure. However, that's in the long term. In the short term, Trent is likely to continue facing difficult market conditions. At Rs 141 the stock trades at a P/E of 5x its annualised 1QFY03 earnings.

     

     

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