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Trent: Consolidating core focus - Views on News from Equitymaster
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  • Sep 7, 2001

    Trent: Consolidating core focus

    The Tata Group's retailing arm, Trent Limited, is back in the news again. As per reports, the company is in negotitations to acquire two South based food retail chains. If the deals go through then it will mark Trent's entry into the food retailing scene. The company till now runs eight 'Westside' stores in different cities, which are basically lifestyle stores.

    The company is talking to Nilgiris and Subhiksha, both of which run food stores in south India (total 63 stores as per newspaper reports). Trent has earmarked a Rs 400 m war chest to get a foot hold in the retail food market estimated at nearly US$ 70 bn. If Trent does manage the acquisitions then it will give a fillip to its retail plans and put it on the fast track.

    Reacting to this news, the stock was already marginally up this morning. Though the news seems good at the first glance, since there are no concrete details available on the financial performance of the south Indian retail chains in question, it is premature to make a judgement on the stock price movement going forward just on this piece of news.

    On the basis of the businesses it currently runs, the company seems to be on the right track. Though the company's bottomline shrunk by 45% in 1QFY02, it managed to grow its topline by an impressive 36% during the same period. A huge decline in the company's other income YoY was largely responsible for the depressed profitability.

    The company faced erosion in the value of its investments in FY01 and as a result had to make provision of Rs 500 m for the same. The company's total investments stood at Rs 1,068 m as on March 31, 2001. Out of this, almost 90% investments were in the mutual funds and related instruments.

    Going by its FY01 annual report the company has an estimated Rs 1,200 m cash chest (including investments). So in a way it is good that the company is looking at ways to deploy this cash to its operations and reduce its dependence on other income. The company has already stated its intention to increase the number of Westside stores from the current 8 to around 20 in the next three years.

    Trent's strategy of reducing its other income dependence seems sound. If it does make the acquisitions then its operational base will get stronger. At the current price of Rs 62 the stock trades at a P/e of 9 times its annualised 1QFY02 earnings. In the short term however, the company may not achieve the Rs 800 m FY02 turnover target it has set for itself.



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