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Trent Limited: Core operations remain unprofitable - Outside View by Luke Verghese

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Trent Limited: Core operations remain unprofitable
Aug 29, 2013

The organised retailing industry is a touch and go business going by the financials of Trent Ltd

A company made up of many parts

As a composite entity Trent Ltd is made up of many parts. In the main it consists of three major brands-Westside, Landmark, and Star Bazaar. Then there are the wheels within the wheels. It has appended the summarised financial statements of 12 group companies in the consolidated accounts. Of this lot, nine companies appear to be direct siblings. The book value of its equity investments in these nine siblings' amounts to Rs 5.5 bn. Then, separately, it has preference share investments valued at Rs 1.6 bn in two of the nine siblings. (Three of the siblings, Landmark Ltd, Fiora Link Road Properties Ltd, and Trexa ADMC Pvt. Ltd are being merged with the parent and should be singing their swan song soon enough). There are also three joint ventures including a company called Inditex Trent Retail India Pvt. Ltd-- in which it has an equity stake of Rs 318 m.

As at end March 2013, the company boasted of 116 stores under the retailing formats of West side, Star Bazaar and Landmark stores. In 2007-08 the number of stores totalled 51. During the year the company added two stores. The Westside store the predominantly private label fashion store continues to be the mainstay of the retailing biz of the company. The stores now cover 42 cities countrywide. Star Bazaar the discount hypermarket format of Trent Hypermarket Ltd now has 15 operational stores. Each outlet is modelled to be a one stop shop offering a wide range of products from fresh foods including dairy, home care, health and beauty products, apparel, home decor, gifts and household items. The company continues to view food and grocery as a substantial opportunity. Under a wholesale supply arrangement Star Bazaar on its part sources its merchandise from Tesco's wholesale cash and carry biz. The third offering Landmark Stores has 19 stores and retails books, music toys, and gaming and is managed by the sibling Landmark Ltd.

Consolidated accounts posts losses

As a standalone entity it rang up revenues from operations of Rs 9.35 bn in 2012-13. As a composite it registered revenues of Rs 21.32 bn for the year 2012-13.The standalone also toted up a pre-tax profit of Rs 830 m while the composite did an ulta by reporting  a pre-tax loss  of Rs 45 m. This is about as conky as it can get. As the 10 year financial statistics of the standalone company shows the net revenues of Trent Ltd have grown each year over that of the preceding year. But the pre-tax profit has chosen to take a roller coaster ride over the same time span. However, the pre-tax profit peaked in 2012-13 at Rs 807 m against Rs 445 m previously. The wavering margins have not affected dividend payouts whatsoever. The dividends have grown each year to touch a high of Rs 272 m in 2012-13. The paid up capital has grown from Rs 131 m in the base year to Rs 402 m in the latest year. Likewise, the reserves and surplus has also grown from Rs 1.9 bn to Rs 15 bn. But the interesting observation about the latter figure is that the securities premium reserve alone amounts to Rs 11.4 bn. Thus the management is apparently injecting bursts of permanent capital at periodic intervals. This is an indication of prudent financial management. Consequently the company was able to restrict the gross debt to Rs 2.2 bn at year end. The net block of fixed assets too has risen sharply from Rs 511 m to Rs 3 bn. But the big bucks growth on the asset side was the increase in the book value of investments to Rs 10.4 bn (non -current and current) from Rs 1.1 bn in the base year. The promoters, the Tata group, hold 28.6% of the outstanding voting capital. The mutual funds including the Unit Trust of India hold an impressive 16.4% of the capital, and Simone Tata is the chairman Emeritus and her son Noel Tata is the vice chairman of the company. The company does not appear to make do with a CEO. As a matter of fact the company does not even shave any whole time directors. It is quite unique in such respects. The company however has a 'Manager' in Philip N Auld. In all probability he reports to the board.

Not generating sufficient margins

It is a moot point as to the source of the generation of margins. It does not appear that it is generating much cash from its frontline operations. Consider some of the following statistics. The company has ponied up a pre-tax profit of Rs 830 m (Rs 537 m previously) before exceptional items. The other income for the year in this figure amounted to Rs 604 m (Rs 903 m previously). There is a sharp drop in other income by Rs 299 m. And for this company every dime counts. However, please notice that in the previous year the other income is larger than the pre-tax profit. Hence, the implication is that but for the other income the company would have reported a pre-tax loss. The other income constituent is a medley of receipts-and represents other income in its entirety. It is not revenue related in any way. It is made up of interest income on 'loans and advances' to group companies and 'deposits' with banks, dividend income from 'current and long term investments' and dividend income from 'siblings' and from the profit on sale of 'current and long term investments'. The dividend income of Rs 3.5 m is but a mere pittance of the book value of investments. As a matter of fact it is some sort of a poor joke. But let that be.

The total amount of loans and advances and inter-corporate deposits at year end to group companies amounted to Rs 2.2 bn. The bank deposits amounted to Rs 1.3 bn. The interest income amounted to Rs 228 m. It is difficult to make any grip of the return on 'capital employed' here given the ever changing face of debt capital. But the return does appear to be a trifle low given the opportunity cost of capital. The last constituent is the profit on sale of investments. The contribution here is Rs 312 m and cannot necessarily be counted upon for an encore given its very make up. And from a casual observation of the investment portfolio over the two year end periods, it is not clear how the company generated such generous profits.

Unproductive capital outlays

There are large outlays of unproductive capital that the company must contend with-given the very nature of its operations. Namely, the quantum of deposits that it had to plonk down on premises that it had taken on rent. The total amount of deposits at year end amounted to Rs 835 m. But the company did have a toe-hold of its own in the market too. It was able to source security deposits amounting to Rs 174 m from creditors. Not only does the company take office space on rent but it also owns space of its own. The largest item under gross block is buildings with a gross value of Rs 1.4 bn at year end. This is followed by furniture and fixtures of Rs 773 m.

The revenues per-se is made up of sale of products of Rs 8.77 bn (net of VAT) and 'other operating revenues' of Rs 589 m. The latter receipt is another crucial component of the operating process. It includes in the main 'Discounts and fees' of Rs 253 m and 'rent' amounting to Rs 238 m. The malleability or otherwise of these two receipts is not known. The two figures represent the revenue side of the equation. On the expenditure side the largest expense item by far was the cost of materials consumed. On a percentage basis it amounted to 55.8% of revenues, net of VAT, against 57.8% previously. The 2% reduction in material consumption costs would no doubt have helped. Employee costs were well contained. The other major expense items that the company found difficult to rein in were retail business fees which rose 13.1%, rent which was up 13.8% and power and fuel which rose 14.2%.

The two other very important factors which gives the company breathing space is the way the debt is structured, and the manner in which the company collects its trade dues and defers its trade payables.  As I had stated earlier the debt amounts to Rs 2.25 bn. But the interest payout amounted to a trifling Rs 166 m. The reason is that the debt consisting solely of non convertible capital at present is either interest free or made at a lower coupon rate. The interest free debt is redeemable at a premium to the face value and the company has already provided for this exigency at the time at of redemption.

The other factor in its favour is its ability in extracting its tithes from the market. It sells almost cash down while delaying payments for trade purchases. This helps the company to save quite some on working capital interest costs.

The siblings

The financials of the siblings is quite a scream in itself. The company with the largest equity base by far is Trent Hypermarket with a paid up capital of Rs 2.23 bn, up from Rs 743 m previously. The next in line is Westland Ltd with a paid up capital of Rs 123 m while Landmark makes do with a capital base of Rs 73 m. Trent also has negative reserves of Rs 1 bn. The company ponied up revenues of Rs 7.85 bn but sad to say could only manage a pre-tax bottom-line in red ink of Rs 761 m.  It is small relief that the pre-tax loss in the preceding year was marginally higher at Rs 789 m. Landmark too realised revenues of Rs 2 bn but closed the year with a pre-tax loss of Rs 385 m. The losses are indeed very large. Westland was in slightly better shape in a manner of speaking with revenues of Rs 278 m and a pre-tax loss of Rs 32 m. The results of all the siblings is collectively a laugh so to speak.. No wonder then that the consolidated results posted a pre-tax loss.

In effect it is a touch and go situation for the company from the manner in which the company is presently structured. How the parent could even propose a dividend given the miserable overall performance is a study in itself. As things stand there are better investment alternatives.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.


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