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Trent: Building up scale but…

Aug 24, 2004

Performance summary
Tata group's retailing arm, Trent Limited, grew its revenues in strong double digits during the June quarter, continuing the trend it set in FY04. The company's topline was up over 45% during the quarter. However, pressure on operating margins resulted in the retailing major reporting a 24% dip in bottomline.

(Rs m) 1QFY04 1QFY05 Change FY04 Change
Net sales 322 469 45.6% 1,551 38.0%
Other income 23 27 20.2% 113 46.5%
Expenditure 285 442 55.1% 1,421 38.2%
Operating profit (EBDITA) 37 27 -26.5% 130 36.1%
Operating profit margin (%) 11.5% 5.8% 8.4%
Interest 0 0 - 0 -71.5%
Depreciation 7 8 24.6% 31 11.4%
Profit before tax 53 46 -13.0% 212 1.8%
Tax 10 14 31.8% 33 -
Extraordinary items 0 0 - -7 -
Profit after tax 43 33 -23.8% 172 1.8%
Net profit margin (%) 13.3% 7.0%   11.1%  
No. of Shares (m) 13.1 13.1   13.1  
Diluted earnings per share* (x) 13.1 9.9   13.1  
P/E ratio (x)   30.4      
(* annualised)          

What is the company's business?
Starting out with one retail store under the brand name 'Westside' in Bangalore in April 1998, Trent has expanded its network to 14 stores across 9 cities. Specialising in apparels, Westside is positioned as a store for the family and is aimed at the middle and upper end of the mass market. Unlike other stores, Trent decided to have its own brands in apparels rather than take up franchises of established brands names like Arrow and Allen Solly. It has its own team of in-house designers who design exclusively for the store. Currently, a typical Westside store portfolio consists of menswear, womenswear, lingerie, kidswear, household accessories, footwear, cosmetics and perfumes. However, all merchandise at the stores, except cosmetics and perfumes, bears the Westside label.

What has driven performance in 1QFY05?
Margin blues: The continuous opening of new stores is aiding the company's topline growth. While this is a positive, competitive pressure has forced the company to offer discounts, which has put pressure on margins. The company's cost of goods has gone up to 46% during the quarter (42% in 1QFY04). This and lower returns from its liquid investments have impacted the bottomline, which saw a 24% dip during the quarter.

Cost break-up
as a % of net sales 1QFY04 1QFY05 FY03 FY04
Total cost of goods 42.3% 45.7% 44.7% 45.6%
Staff cost 6.9% 7.0% 6.8% 7.0%
Advertisement & promotion 10.0% 9.8% 8.1% 8.7%
Store launch exp. amortised 0.0% 0.6% 1.4% 1.2%
Other expenditure 29.2% 31.0% 30.5% 29.2%
Total expenditure 88.4% 94.2% 91.5% 91.6%

New store momentum: Trent is looking at adding 5 more Westside stores in FY05, taking the total store tally to 19. The company will also launch its first food retailing unit in Ahmedabad in Gujarat during December quarter this year. Trent has adopted a strategy to establish the Westside brand in all large towns with a population of over one lakh. This we believe, will continue to provide the necessary fillip to its topline and increase its economies of scale over the long term.

Cash rich: Most of this capex will be funded through internal accruals. The company had Rs 1.1 bn worth of cash plus liquid investments as per its FY04 annual report. This will mean a continuity of more or less zero interest costs going forward. However, depreciation provisioning will continue to move up, reflecting the increase in the number of stores.

Over the last five quarters
It is clear from the table below, that Trent has continued to grow revenues at a fast pace over the past one year consistently. However, it has not been able to keep its margin profile intact. Its operating margins have steadily declined indicating competitive pressure. Another thing to note is that whenever other income has shot up, Trent's net profit growth has almost certainly followed in tandem. It indicates that the company continues to depend heavily on its non-core operations to pep up its overall profitability. Just to put things in perspective, in FY04, Trent's other income made up for 53% of the company's profit before tax and extraordinary items (59% in 1QFY05).

1QFY04 2QFY04 3QFY04 4QFY04 1QFY05
Sales growth (YoY) 61.2% 50.4% 18.7% 31.9% 45.6%
OPM (%) 10.6% 7.3% 7.7% 5.3% 5.8%
Net profit growth (YoY) 82.8% 41.6% 83.8% 72.4% -23.8%
Other income growth (YoY) -47.3% 107.4% 149.7% 691.4% 20.2%

What to expect?
At Rs 302, the stock trades at 30.4 times annualised 1QFY04 earnings, market cap. to sales of 2.1x. The valuations are at the upper end of the spectrum. There is no doubt that Trent will continuously add scale to its revenues over the next couple of years. However, on the flip side, its dependence on the other income is unlikely to go away in the near future. Also, the investing environment continues to be difficult and the company will therefore, find it difficult to improve its returns from its investments in the current year. This will continue to put pressure on its FY05 performance.

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