Trent lost most of the gains (3.3 per cent) it made on the bourses after raising Rs 250 crore through the qualified institutional placement (QIP) route on March 14. Its stock has dropped 2.5 per cent after the exercise. In fact, its performance in 2012 has been a contrast (a laggard) as compared to 2011, when the stock outperformed larger peers and the BSE Sensex. One reason here are the high valuations.
While the QIP would help the business grow, restructuring of operations of some of its retail formats should also improve profitability, say analysts. Though these are positives, the stock’s valuation of 48 times the estimated earnings of 2012-13 look stretched, especially when peers such as Pantaloon (18 times) and Shoppers Stop (46 times) are trading at lower valuations, based on their one-year forward earnings estimates. With the March 2012 quarter performance also expected to be subdued, the near-term upside for the stock looks limited.
Improving profitability
Trent’s profitability has been under pressure for five years, partly because of the company being in the investment phase and few loss-making ventures. On a consolidated basis, though sales have increased at a compounded annual growth rate (CAGR) of 31.6 per cent between financial years 2006 and 2011, net profit has declined from Rs 29 crore to Rs 7.85 crore. Its performance for the nine months ended December 2011 suggests not much has changed; Trent reported an adjusted net loss of Rs 36.6 crore on consolidated sales of Rs 1,463 crore.
| HIGHER GAINS IN FY13 | |||
| In Rs crore | 9M' FY12 | FY12E | FY13E |
| Total operating income | 1463 | 2275.5 | 3167.2 |
| % change y-o-y | NA | 42.9 | 39.2 |
| Operating profit | -24 | 28.6 | 105.6 |
| % change y-o-y | NA | 130.2 | 269.9 |
| Net profit | -37 | 4.6 | 58.2 |
| % change y-o-y | NA | 97.8 | 1178.6 |
| Consolidated financials Source: Company, Bloomberg, Analyst estimates | |||
The company has closed five loss-making value fashion retail format ‘Fashion Yatra’ stores (started in 2008) and is to completely restructure its five-year-old franchise agreement with the Benetton Group for the Sisley brand (eight stores; agreement will come up for renewal at the end of 2011-12). The move pertaining to these two ventures, which impacted the results for the nine months of this financial year is also expected to impact results for the March quarter, due to inventory liquidation, recovery of capex incurred in respect of the stores concerned and related settlements with certain counter-parties.
Besides Zara (seven stores), Trent has formed another agreement with the Inditex group to bring Massimo Dutti to India. It plans to turn its book and music chain, Landmark (17 stores) into a family entertainment format, with focus on toys, tech accessories, gaming and stationery.
For Star Bazaar, in addition to branded products, the thrust is on private labels for a wide range of products (own, as well as those of joint venture partner Tesco).
Says Abhishek Ranganathan, analyst, MF Global, in his report dated March 13: “We view the restructuring decisions as a positive and the same should be margin-accretive for its standalone operations from FY13.
” Star Bazaar’s losses are likely to narrow and the performance of Landmark, which suffered due to inventory problems on account of legacy information technology problems and incurred losses, is expected to improve as it is now integrated to the SAP-ERP system, alongside all its major formats, he adds. Overall, 2012-13 should be far better in terms of profitability, with all these efforts starting to bear fruit.
QIP fillip
The QIP issue of 2.74 million shares at Rs 912 each, successfully subscribed two times, will help expand the current network of 100-odd stores across 37 cities, invest in some retail real estate development and further improve its debt to equity ratio (0.3 times in 2010-11). The company plans to achieve a store target of 100 for Westside (lifestyle retail format) and 50 for Star Bazaar (hypermarket chain) in the next four years from the current 61 and 14, respectively. Participation of reputed domestic institutional investors like LIC and Wipro’s venture capital fund in the QIP shows their confidence in the company’s long-term growth prospects.
But, benefits priced in
Trent has been an outperformer on the bourses, unlike larger peers such as Pantaloon Retail and Shoppers Stop. Its stock declined only 10.5 per cent in 2011, when the Sensex had declined 25 per cent and its peers’ stock prices fell by an average of 45 per cent. However, it has under-performed in the rising market of 2012, gaining only six per cent till date while the Sensex is up 11 per cent, Shoppers Stop has jumped 55 per cent and Pantaloon is up 14 per cent.
Analysts attribute this to the company’s slow pace of expansion and low debt to equity ratio (less than 0.5 times) historically, which proved in its favour during the slowdown. Nevertheless, they believe the valuation, at 47 times, more than factors in near-term positives. In other words, it has factored in near-term growth while ignoring its relatively smaller size of operations and financial performance, which are likely to take time to improve.
On the other hand, Pantaloon, the largest retail player, is trading at a trough valuation of 18.4 times, partly due to huge debt burden. The second largest, Shoppers Stop, is trading at a peak valuation of 46 times, even as it has performed better than peers and analysts expectations for many quarters.
Trent, thus, needs to grow earnings at a faster pace to justify higher valuation. Analysts say a firm trend of a reversal in losses (seen for the past three years) at Star Bazaar and Landmark will also prove a significant positive catalyst.
