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Trent: Other income boost - Views on News from Equitymaster
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Trent: Other income boost
Oct 27, 2009

Performance summary
  • Revenue growth stands at nearly 6% YoY during 2QFY10. Pick up in sales could driven by festive season sales.
  • Operating costs continue to grow at a faster rate as compared to net sales, thus resulting in loss of Rs 59 m.
  • However, at the net level, Trent reports nearly 49% YoY growth. The same is backed by 32% YoY growth in other income.
  • During the quarter, the company opened two Westside stores taking the total number of Westside stores to 40 and the total number of all format stores to 46 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, performance is not truly comparable on a year on year basis.

Financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 1,289 1,364 5.9% 2,590 2,559 -1.2%
Expenditure 1,342 1,424 6.1% 2,667 2,608 -2.2%
Operating profit (EBDITA) (53) (59)   (78) (50)  
EBDITA margin (%) -4.1% -4.4%   -3.0% -2.0%  
Other income 123 163 32.4% 270 258 -4.3%
Interest 3 17 407.7% 7 22 232.8%
Depreciation & amortisation 25 26 2.3% 48 48 -0.5%
Profit before tax 42 61 46.7% 138 139 0.6%
Tax 7 9 34.7% 21 35 71.5%
Profit after tax 35 53 48.9% 118 104 -11.8%
Net profit margin (%) 2.7% 3.9%   4.5% 4.1%  
No. of shares (m)       19.5 19.5  
Diluted earnings per share (Rs)*         13.0  
P/E (x)         50.0  
(*trailing twelve month earnings)

What has driven performance in 2QFY10?
  • Trent Ltd, the lifestyle retailer witnessed pickup in sales during 2QFY10 as it reported nearly 6% YoY growth in revenues. Apart from the slow and steady recovery of the economy, onset of festive and marriage season is what seems to have backed the topline growth. A lifestyle retailer like Trent Ltd is more exposed to impact of economic slowdown as disposable income takes a hit. Considering the past few quarters, the single digit growth is respectable as earlier it witnessed stable to lower growth in revenues.

  • Operating costs grew at a faster rate as compared to revenues, resulting in operating loss of Rs 59 m in 2QFY10. As a percentage of sales basis, the company managed to lower costs except for other expenses. The costs are on a higher side on account of expansion plans. New store openings lead to increase in costs across the board. The benefit of scaling up retail space should be visible in the following quarters as it starts generating revenues. Also, with revival in economy the company is expected to find takers for its lifestyle offerings.

  • At the net level, the company has reported nearly 49% YoY growth. This is despite more than five-fold increase in interest costs. The 32% YoY growth in other income has cushioned the profitability at the net level. If one excludes other income, loss at the net level stands at Rs 111 m.

What to expect?
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. Further, considering the company’s dependence on income other than retailing business, we would advice investors to practice caution. At the current price of Rs 650, the stock is trading at a price to earnings multiple of 50 times its trailing twelve month earnings.

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