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Trent: Improving scenario, yet long way - Views on News from Equitymaster
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Trent: Improving scenario, yet long way
Aug 7, 2009

Performance summary
  • Revenues decline by 8.3% YoY during 1QFY10, as consumers are not splurging on luxury items as previously done.
  • Operating profits report four-fold growth as operating costs fall at a steeper rate as compared to topline.
  • Despite a good show at the operating level, net profits decline by 37.8% YoY on account of higher interest costs and taxes.
  • During the quarter, the company opened two Westside stores taking the total number of Westside stores to 38 and the total number of all format stores to 44 stores.
  • With effect from 1st August, 2008 the company transferred its Star Bazaar business as a going concern to its 100% subsidiary Trent Hypermarket Ltd. Hence, the performance is not strictly comparable on a year on year basis.


Financial performance snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 1,334 1,223 -8.3%
Expenditure 1,325 1,185 -10.6%
Operating profit (EBDITA) 9 38 324.4%
EBDITA margin (%) 0.7% 3.1%  
Other income 113 66 -41.5%
Interest 3 5 55.6%
Depreciation & amortisation 23 22 -3.6%
Profit before tax 96 78 -19.4%
Tax 14 26 88.6%
Profit after tax 82 51 -37.8%
Net profit margin (%) 6.2% 4.2%  
No. of shares (m) 19.5 19.5  
Diluted earnings per share (Rs)*   12.1  
P/E (x)   41.2  
(*trailing twelve month earnings)

What has driven performance in 1QFY10?
  • Trent Ltd, the lifestyle retailer continued to report dismal performance during the quarter. The company witnessed an 8.3% YoY fall in its topline. While the exact reason for the same is not known, the decline in net sales could be attributed to the economic slowdown. During times of an economic slowdown such as this, discretionary spending is the first one to take a hit as disposable income in the hands of the people gets affected.

  • During the quarter, the company managed to lower its overall cost of operations. This was the result of lower raw material and employee costs. Despite, higher advertising and other expenses continuing to grow, the company was able to improve profitability as it could lower its inventory cost and employee cost. It seems during the quarter the company had streamlined its inventory purchases, as it was able to lower the stock in trade and work-in-progress. The cost of purchase of traded goods was also lower in this quarter. One must also note that during the same quarter last year, the inflationary trend witnessed in the economy had impacted profitability of the company. While the margins improved considerably by 2.5% to 3.1% in 1QFY10, further improvement is necessary to cover up the costs (such as interest and depreciation costs) apart from cost of operations.

  • At the profit before tax (PBT) level, profits were down by 19.4% YoY on account of lower other income and higher interest costs. If one excludes other income, then the company reported profit of Rs 11 m at the PBT level, while during the same quarter last year it had reported a loss of Rs 17 m. This highlights the fact that the company’s dependence on income other than its retailing business is reducing.

  • Despite a good show at the operating level, bottomline declined by 37.8% YoY. This was on account of de-growth at the PBT level and higher tax outgo.

What to expect?
At the current price of Rs 499, the stock is trading at a price to earnings multiple of 41.2 times its trailing twelve month earnings. Given that the management is focused on the strategy of setting up new stores and is looking at similar retail initiatives, the long-term growth prospects of the company look promising. The company’s business model is skewed towards lifestyle retailing, where revival would come in slower as compared to the value retailing business. A prolonged economic slowdown is what can impact its growth in the future. However, as aspiring individuals are getting added to the earners’ category and with the change in the economic cycle, the sector will find takers once again.

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