Trent: Landmark Deal

The latest acquisition has re-rated the Trent stock

It's not very often that Trent has beaten Pantaloon Retail in terms of stock price performance. In fact, over the past two years Trent has underperformed Pantaloon by a significant margin, which, therefore, makes Trent's outperformance in the recent past stand out.

Buoyed by the acquisition of books and music retailer Landmark this week, Trent's stock price has risen by 36 per cent in August. Pantaloon's valuation has remained at pretty much the same levels compared with month-ago levels.

Needless to say, the huge valuation differential Pantaloon used to enjoy over Trent has now narrowed down considerably. Only a month ago, it used to trade at nearly a 60 per cent premium over Trent, in terms of the one-year forward PE.

Based on current prices, the premium has narrowed to 21 per cent. Of course, one of the reasons for this is the sharp correction in Pantaloon's stock price after it hit all-time highs last week.

The main reason, however, is Trent's rerating thanks to the Landmark acquisition, which will add about 30 per cent to its top line based on FY05 numbers.

Compared with Pantaloon, Trent had always taken a soft strategy in terms of setting up new stores and entering new locations, which had led to the vast valuation differential.

The acquisition of books and music retailer is, in that sense, a giant leap for Trent. What's more, since the deal was an all-cash one, there wouldn't be any equity dilution. Funds would hardly be an issue, since Trent had recently done a rights issue which raked in about Rs 118 crore.

While the narrowing of valuation differential with Pantaloon may be all right, Trent's current valuations of over 35 times forward earnings is rather high by itself.

Alok Agarwal of Motilal Oswal Securities points out that the valuations of retail stocks such as Trent and Pantaloon point to high growth expectations, and any drop in growth rates from expected levels could severely impact valuations.

GE Shipping demerger

The demerger announced by GE Shipping will unlock value in its two divisions and enable its stock price to reflect the inherent value of the respective businesses.

The stock was up about 1.5 per cent on Wednesday, but the stock has already gained about 14 per cent over the last three weeks, as the street had been factoring in this development.

The senior company management pointed out that shares of the new company will be proportionately allotted to shareholders of GE Shipping, in accordance with a scheme of arrangement to be formulated.

The planned demeger would also help to eliminate the inherent differences of the two businesses in Great Eastern vis-a-vis the respective business cycles and operating environment.

For instance, the shipping business is more volatile than the offshore business, although GE Shipping has been attempting to minimise the fluctuations via long term contracts.

In contrast, the offshore division is experiencing a clear uptrend thanks to the well-documented upturn in the upstream oil industry. GE Shipping is one of the few domestic players to provide a comprehensive range of services in its offshore division.

The offshore business contributed about 16 per cent of the total segment profit of GE Shipping in FY05.In sum, the demerger would allow future investors to choose the business they want to have an exposure to.

With contributions from Mobis Philipose and Amriteshwar Mathur