Trent: Retail ride

New stores do the trick for Trent in March

Trent's March quarter results seem to have disappointed the markets "" the Trent stock closed 2.2 per cent lower on Friday, post the results announcement.

At first sight, the results for the fourth quarter look good, especially when compared with the performance in the first three quarters. Retail sales rose 60.7 per cent last quarter, higher than the 52.3 per cent growth recorded in the first nine months of the fiscal.

What's more, operating profit more than doubled, compared with a much lower 34.7 per cent growth in the nine-month period.

But March quarter numbers were buoyed by three new stores that opened last fiscal "" especially the company's first Hypermarket, which was launched in November 2004.

In fact, retail sales had jumped 69 per cent in the December quarter thanks to the launch of the Hypermarket. Last quarter's 61 per cent growth, therefore, is less impressive especially since it had the benefit of the new store's operations for the whole quarter.

For the whole year, Trent's retail operations grew by an impressive 55 per cent. Its EPS, however, grew just 11 per cent, thanks to a drop in profitability and lower treasury income.

Trent's gross margins fell by 370 basis points, partly because of its Hypermarket operations, which typically operate on lower margins. The hit at the operating profit level was restricted to just 90 basis points, thanks to savings on other overheads.

Besides, treasury income fell by 45 per cent, which impacted overall profit growth because it accounted for a rather high 40 per cent of total segment profit in FY04.

Analysts point out that Trent had made significant gains from growth funds in FY04, which weren't repeated since investments were later shifted to income funds.

The treasury segment now accounts for a much lower 17 per cent of total segment profit, which means it won't impact overall profit growth the way it did last year.

The core retail operations are set for another year of high growth, since the company is slated to launch a number of new stores including more Hypermarkets this year.

However, at 47 times consolidated earnings for FY05, the markets have already priced in aggressive growth. Yet, a look at the enormous response to the Provogue IPO shows that the voracious appetite for retail stocks continues.

It's this investor interest that could drive valuations ahead from the current expensive levels.

TV Today

TV Today Network Ltd has reported a 34 per cent fall in its profit before tax to Rs 9.69 crore for the March quarter. The lacklustre quarterly results led to the stock dipping about 8.8 per cent in Friday trading.

The company's income from operations dipped 8 per cent to Rs 39.34 crore. Analysts' point out that the net advertisement rates realised for the channel Aaj Tak have fallen on a y-o-y basis, coupled with advertisers' continued apathy for the channel Headlines Today.

In addition, other expenses have increased 11.45 per cent to Rs 12.94 crore in the last quarter and that's largely due to expenses related to implementation of the new look of the channel Aaj Tak.

As a result, the operating profit fell 26.18 per cent to Rs 12.35 crore in the last quarter and operating profit margins shrank 773 basis points to 31.39 per cent.

Meanwhile, for FY05, employee costs jumped 25 per cent due to the salary hikes given earlier. Also, higher other expenses led to the company's operating profit margin shrinking 1844 basis points to 24.5 per cent in FY05 and the EPS halving to Rs 2.83.

Going forward, the underlying concern is that the company could have to grapple with a further rise in its employee costs in a bid to minimise attrition rates, given the spate of channels planned for launch.

Such a development could hit operating margins further, going forward. The stock currently trades at about 19 times forward earnings as compared to 23 for its rival and that's largely due to the street's concern regarding the viability of the company's English channel.

Monsoons and manufacturing

The monsoon's delay in advancing up the western coast has been a matter of concern. The experts say that it's still too early to worry, and not much harm will be done if the rains arrive soon.

International meteorologists have said that the chances of an El Nino this year are minimal.

But even if there is a full-fledged drought, it is unlikely to have much of an effect on overall growth. To take last year's example, an overall rainfall deficiency of 14.5 per cent didn't stand in the way of overall GDP going up by an estimated 6.9 per cent. Industrial production increased by 8.2 per cent.

However, the impact of a drought on industrial production and GDP is via a reduction in consumption expenditure, which affects industry with a lag.

The impact of the negative agricultural growth of 2.4 per cent in 1997-98, for example, was felt a year later, with manufacturing slumping to a growth rate of 3.7 per cent.

The drought of 1999-00 didn't really impact manufacturing, which showed a robust growth rate of 6.5 per cent in 2000-01. But the second consecutive year of drought in 2000-01 did hurt manufacturing, which grew by only 3.6 per cent in 2001-02.

Interestingly, a decline of 7 per cent in agricultural growth in 2002-03 had hardly any impact on manufacturing, which grew by 6.6 per cent in 2003-04. The effect of agriculture on manufacturing has been decreasing.

This year, there are other favourable factors. One, much of the growth in manufacturing is led by investment demand. Two, exports are growing handsomely. And three, the rate of growth in services is also high.

With contributions from Mobis Philipose and Amriteshwar Mathur