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Trent: Other income saves the day
Oct 22, 2008

Performance summary
  • Topline grows by 14% YoY and 12% YoY in 2QFY09 and 1HFY09.

  • Reports Rs 53 m and Rs 78 m operating loss in 2QFY09 and 1HFY09 on account of scaling cost of operation.

  • Even after bleeding at operating level, the company closed 2QFY09 and 1HFY09 in profits. The same is the result of higher other income.

  • If one excludes the other income, the company bleeds at the net level, reporting Rs 88 m and Rs 153 m losses in 2QFY09 and 1HFY09 respectively.

  • During the quarter, the company has opened one Westside store and one Star bazaar store, taking the total store count of Westside to 32 and Star Bazaar to 4.



Financial performance snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 1,129 1,289 14.2% 2,316 2,590 11.8%
Expenditure 1,120 1,342 19.8% 2,236 2,667 19.3%
Operating profit (EBDITA) 8 (53)   81 (78)  
EBDITA margin (%) 0.7% -4.1%   3.5% -3.0%  
Other income 128 123 -3.7% 177 270 52.4%
Interest 3 3 0.0% 7 7 0.2%
Depreciation & amortisation 21 25 21.5% 35 48 35.3%
Profit before tax 112 42 -62.8% 216 138 -36.0%
Tax 21 7 -69.1% 47 21 -56.0%
Profit after tax 91 35 -61.3% 169 118 -30.5%
Net profit margin (%) 8.1% 2.7%   7.3% 4.5%  
No. of shares (m)       19 20  
Diluted earnings per share (Rs)*         14.2  
P/E (x)         26.5  
(*trailing twelve month earnings)

What has driven performance in 2QFY09?

  • The company reported topline growth of 14% YoY and 12% YoY during 2QFY09 and in 1HFY09. The subdued performance has been the result of slowdown in economic growth. The company has a higher presence in lifestyle retailing business, the one that is driven by discretionary spending. In case of economic slowdown, discretionary spending is the first to take a hit. The same seems to have impacted the company’s performance in 1HFY09. However, one must note that the 2QFY09 and 1HFY09 results are not truly comparable as with effect from 1st August, 2008 the company has transferred its Star Bazaar business as a going concern to its 100% subsidiary Trent Hypermarket Ltd.

    Cost break-up

    (% of sales) 2QFY08 2QFY09 1HFY08 1HFY09
    Raw materials consumed 52.9% 53.1% 52.1% 52.8%
    Staff cost 7.1% 7.5% 7.4% 8.2%
    Advertising 9.2% 10.2% 8.6% 9.2%
    Other expenses 30.0% 33.3% 28.4% 32.7%

  • Operational costs continue to eat into the company’s operating profits. The company has reported operating loss of Rs 53 m during 2QFY09 as costs grew at a much faster rate compared to topline growth. While all cost heads increased, advertising charges and other expenses caused the maximum damage to operating profits. The latter was a result of higher occupancy rates and the pre-operative expenses of new stores that have been fully charged off in 2QFY09.

  • Even though the company was unable to cover its operational costs, it closed the quarter in profits. However, if one excludes other income, then it is observed that the company has bled even at the bottomline level. Apart from the poor show at the operating level, higher depreciation charges have further exerted pressure on net profits of the company.

What to expect?
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. The margins are expected to remain under pressure in the medium term. However, with increased scale of operation economies of scale should result in margin expansion over a period of time.

At the current price of Rs 375, the stock is trading at a price to earnings multiple of 18 times our estimated FY11 earnings. We expected the company to report Rs 100 m profits for the full year ended March 2009. However, the company has run into losses and we may have to downgrade our estimates. Post the management meeting we would get back with our revised estimates and update our research report on the stock.

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