Investment Idea  - Trent Ltd. : Recommended as "Hold"
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Investment Idea - Trent Ltd. : Recommended as "Hold"

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Trent Limited, a Tata group company is one of the leading players in the organized retail ...

Trent Limited, a Tata group company is one of the leading players in the organized retail
sector in India with presence across lifestyle retail, value retail and other business formats.


Based on a consolidated FY12 P/S multiple of 1.5, the fair value for the
company works out to Rs 1190.

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  • 1. September 25, 2010 TRENT LTD HOLD Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs Strong Buy Trent Limited, a Tata group company is one of the leading players in the organized retail Buy sector in India with presence across lifestyle retail, value retail and other business formats. Hold Reduce • The company expects to roll-out nearly 25 stores under its various formats in FY11 by Sell spending nearly Rs 1.5-1.7bn including 8-10 Westside stores, 7-8 Star Bazaar Strong Buy – Expected Returns > 20% p.a. Buy – Expected Returns from 10 to 20% p.a. hypermarkets and 4-5 Landmark book and music stores, among others. Hold – Expected Returns from 0 % to 10% p.a. • While Westside has shown marked improvement in the last 2-3 quarters, the company’s Reduce – Expected Returns from 0 % to 10% p.a. with possible downside risk Sell – Returns < 0 % hypermarket and book & music retail businesses are expected to show improvement over the coming quarters as discretionary spending rises amid higher same store sales (SSS) growth. • The company intends to replicate the success of higher share of private labels in its STOCK DATA BSE / NSE Code 500251/ TRENT hypermarket business, as has also been the case with international players worldwide Bloomberg Code TRENT IN EQUITY • The company is well funded with a debt-equity ratio of less than 0.5. Recently it has No. of Shares (Mn) 20.1 Sensex / Nifty 19,942/5,991 successfully raised nearly Rs 4.9bn from the preference share route which would be PRICE DATA compulsorily converted to equity by Sept 2012, raising concerns on equity dilution. CMP Rs (22nd Sept' 10) 1,081.3 Beta 0.45 • We estimate Trent Ltd’s revenues to grow at a CAGR of 32.6% over FY2010-12 to Rs Market Cap (Rs mn) 21,680 19.4bn by FY2012. We further estimate that PAT would grow at a CAGR of 245% over 52 Week High-low 1196 - 604 Average Daily Volume 21,528 FY2010-12 to Rs 186mn in FY2012 from Rs 16mn in FY2010. STOCK RETURN (%) 30D 3M 6M 1Y Based on a consolidated FY12 P/S multiple of 1.5, the fair value for the Trent Ltd 3% 23% 32% 66% company works out to Rs 1190. Sensex 8% 12% 15% 18% Nifty 8% 13% 15% 19% Financial Snapshot SHARE HOLDING PATTERN (%) Projections (Rs Mn) FY08A FY09A FY10A FY11E FY12E Promoter 31.3 Institution 30.9 Revenue 7,180 8,497 11,054 15,096 19,445 Non Institution 37.8 Y-o-Y Growth % 17.8% 18.3% 30.1% 36.6% 28.8% Total 100.0 EBIDTA 687 314 460 753 922 1 Year Price Performance (Rel. to Sensex) Y-o-Y Growth % 1.5% -54.3% 46.5% 63.6% 22.4% PAT after MI & EO 336 10 16 149 186 Y-o-Y Growth % -0.9% -96.9% 50.0% 853.6% 24.8% 90 80 EPS Rs 8.0 0.5 0.8 7.4 7.6 70 Sensex Trent Ltd BVPS Rs 159.6 153.4 292.6 299.9 352.9 60 EBIDTA % 9.6% 3.7% 4.2% 5.0% 4.7% 50 40 NPM % 4.7% 0.1% 0.1% 1.0% 1.0% 30 ROE % 5.0% 0.3% 0.3% 2.5% 2.1% 20 P/S Ratio 1.4 1.1 10 0 P/B Ratio 3.6 3.1 -10 * EPS, BVPS adjusted for rights issue shares -20 www.fullertonsecurities.co.in Page | 1
  • 2. September 25, 2010 BUSINESS PROFILE Trent Ltd is one of the foremost retailers in India and is part of the larger Tata Group. Begun in 1996, Trent Ltd was initially named “LAKME Ltd” but later moved its cosmetic business and its subsidiary to Lakme Lever Ltd, a joint venture with Westside has 90 per Hindustan Lever Ltd. From there, the firm has grown, acquiring Littlewoods International (India) Pvt Ltd in 1998 which was cent of its merchandise as private label brands then renamed Trent Ltd. ensuring higher Lifestyle Retail: The Company is owner and controller of Westside chain of department stores, present in over 29 cities margins with 46 stores. The chain is a well-established brand in the lifestyle retail segment and is into retailing of readymade garments for men, ladies and children, footwear, accessories, gifts and artifacts, furnishings, toys, and a range of home accessories etc. Value Retail: In the value retail segment, the company is currently present via its Star India Bazaar model. The hypermarket chain offers a wide choice of products, ranging from grocery, beverages, health and beauty products, farm and dairy produce, in-house apparels, etc. The Company’s association with Tesco Plc, UK’s leading retailer is expected to bring operational Landmark has efficiencies to this business as it plans to source merchandise for Star Bazaar from Tesco’s planned wholesale cash and carry continued to offer the business in India, benefiting from Tesco’s supply chain expertise. Currently the Company has 7 stores across Ahmedabad, largest collection of books in the country Bangalore, Chennai and Mumbai which it plans to increase to 50 in the next 3-4 years. with over 100,000 titles Specialty Retail: Landmark stores - the books plus music, toys and furnishing format - has 27 operational stores across the in each of the larger stores. country including airport and hotel stores. The recently opened 42,000-sq ft Landmark store at the Palladium, High Street Phoenix Mills, in Mumbai received an overwhelming response with 7000 walk-ins on the very first day. Trent also has a franchisee arrangement with Benetton of Italy for Sisley stores for India and has a tieup with Inditex of Spain for Zara stores. Retail Business Expansion Across Formats Retail Chains Business Format FY08 FY09 FY10 FY11E FY12E Westside Lifestyle Retail 28 36 43 51 56 Star Bazaar Value Retail 3 4 7 15 29 Landmark Specialty Retail 18 23 27 32 37 Others - 0 7 7 11 13 Total Stores 49 70 84 109 135 Timely Pickup in Expansion as the economy recovers…. The company has a capital expenditure plan of Rs 1.5-1.7bn for the current fiscal for the expansion of all its formats such as Since H2FY10, higher Westside (apparel), Star Bazaar (food and grocery) and Landmark (books and accessories). The company expects to roll-out pace of economic nearly 25 stores under its various formats in FY11. That includes 8-10 Westside stores, 7-8 Star Bazaar hypermarkets and 4-5 recovery led to improved performance Landmark book and music stores, among others. of Westside stores The company plans to invest around Rs 2.75bn to open 50 new stores over the next 3-4 years in its hypermarket format Star Bazaar. However, aggressive addition of Star Bazaar Hypermarkets is expected to continue to put pressure on the bottom line of the company at least for the next 2-3 years as the company expects a break-even for Star Bazaar only after it attains a critical mass of 25 stores, even as business format would witness a double-digit growth this fiscal. www.fullertonsecurities.co.in Page | 2
  • 3. September 25, 2010 BUSINESS PERFORMANCE Strong Revenue Growth ahead…. The standalone FY10 revenues rose 9.31% to Rs 5.4bn as against Rs 4.9bn during FY09. The Net profit also rose Net profit to grow at a 50.30% to Rs 402mn as against Rs 267mn during the previous year ended March 2009. On a consolidated basis also, CAGR of 245% over it reported a 30% growth in revenues, which came in at Rs. 11bn as against Rs 8.5bn in FY09. However, the FY10-12 profitability was impacted by losses at Star Bazaar and Sisley. During Q1FY11, the revenues rose 28.87% to Rs 1.5bn as against Rs 1.19bn during the previous quarter ended June 2009. Annual Revenues & Margins Quarterly Standalone Performance 25000 12% 1800 20% 1600 18% 20000 10% 1400 16% Revenues (Rs mn) Revenues (Rs mn) 1200 14% Margins(%) Margins(%) 8% 12% 15000 1000 10% 6% 800 8% 10000 600 4% 6% 400 4% 5000 2% 200 2% 0 0% 0 0% Revenue (Rs mn) PAT Margins EBITDA Margins Net Revenue (Rs mn) EBITDA Margins Peer Group Comparison Revenue EBIDTA PAT Margin P/ S P/B CMP FV Companies ROE % (Rs. mn) Margin (%) (%) (x) (x) (Rs.) (Rs.) Trent Ltd 11,054 4.2% 0.1% 0.3% 2.0 3.7 1081 10.0 Pantaloon Retail (India) 97,869 9.7% 0.7% 2.6% 1.1 3.9 486 2.0 Shoppers Stop 15,852 6.9% 2.3% 14.4% 1.4 8.6 616 10.0 Provogue (India) 4,741 14.4% 4.4% 2.4% 1.5 0.9 63 2.0 * FY10 consolidated figures , June Y/E for Pantaloon Retail Peer Comparison Historically, the company has been slow as compared to its peers in terms of expanding its retail chains. However, in Pickup in expansion during downturn the last few quarters, the pace of expansion has picked up with nearly 20 store additions since FY09. Besides, the expected to save on company is also expected to benefit on reasonable rental agreements as well as higher same store sales (SSS) going rentals forward. The company is also well funded with debt-equity ratio below 0.5. www.fullertonsecurities.co.in Page | 3
  • 4. September 25, 2010 VALUATION We estimate Trent Ltd’s revenues to grow at a CAGR of 32.6% over FY2010-12 to Rs 19.4bn by FY2012. Based on a consolidated We further estimate that PAT would grow at a CAGR of 245% over FY2010-12 to Rs 186mn in FY2012 from FY12 P/S multiple of 1.5, the Rs 16mn in FY2010. fair value for the company works out to Rs 1190. As we expect the 25-30% of the revenue growth from the relatively low margin Food & Grocery (F&G) hyper mart business, which will take another 2-3 years to contribute to the consolidated bottom-line, we have conservatively valued the consolidated entity at a 1 year forward Price / Sales (P/S) multiple of 1.5. Based on a consolidated FY12 P/S multiple of 1.5, the fair value for the company works out to Rs 1190. We recommend a ‘HOLD’ rating on the stock. Financial Analysis and Projections Particulars (Rs Mn) FY08A FY09A FY10A FY11E FY12E Net Revenue 7,180 8,497 11,054 15,096 19,445 Other Income 372 355 406 315 430 Total Income 7,552 8,852 11,460 15,411 19,876 Operating Expenditure 6,864 8,538 10,999 14,658 18,954 Depreciation 125 159 221 238 255 EBIT 562 155 240 515 667 EBIT Margin (%) 7.8% 1.8% 2.2% 3.4% 3.4% Interest 150 149 148 282 349 Profit Before Tax 413 5 91 233 318 Less: Tax 72 3 77 79 108 Profit After Tax 340 2 15 154 210 Minority Interest 4 -8 -1 5 24 PAT After MI & EO 336 10 16 149 186 PAT Margin (%) 4.7% 0.1% 0.1% 1.0% 1.0% ROE (%) 5.0% 0.3% 0.3% 2.5% 2.1% EPS (Rs) 8.0 0.5 0.8 7.4 7.6 BVPS (Rs) 159.6 153.4 292.6 299.9 352.9 Valuation Ratios (x) FY11E FY12E P/S Ratio 1.4 1.1 P/B Ratio 3.6 3.1 * EPS, BVPS adjusted for rights issue shares www.fullertonsecurities.co.in Page | 4
  • 5. September 25, 2010 Board Of Directors Director Name Current Position Description Mr. F. K. Kavarana is Non-Executive Chairman of the Board, Non-Independent Non-Executive Director of Trent Ltd. He is a Director of Tata Sons Ltd. and Tata Industries Ltd., the apex holding companies of the Tata Group. He is Chairman of several Tata Companies in India and abroad. Between 1994 and 2000, he was Executive Director of Tata Engineering & Locomotive Co. Ltd. (now Tata Motors Ltd.), India’s largest automobile manufacturer. Prior to that he was Vice-Chairman & Managing Director of Tata International AG, Switzerland, responsible for the Tata Group’s overseas operations and investments. Before joining the Tata Group in 1975, he held key positions with McKinsey & Co. Inc., in London and Washington D. C. - as well as the Bowater Corporation in London and Europe. He has advised F K Kavarana Chairman international financial institutions, including the World Bank, as well as industrial companies on strategic and organizational issues. Mr. F. K. Kavarana Graduated with Bachelor of Commerce (Hons) Degree from the University of Bombay in 1963, and with an Masters of Business Administration from the Wharton School, University of Pennsylvania in 1970. He is also a Fellow of the Institute of Chartered Accountants in England and Wales. Names of the other Public Companies Mr. F. K. Kavarana holds Directorships as on 31st March, 2005 are Tata Sons Ltd., Tata Industries Ltd., Tata Tea Ltd., Titan Industries Ltd., Tata Projects Ltd., Tata Infotech Ltd., Tata AIG Life Insurance Co. Ltd. , Tata AIG General Insurance Co. Ltd. , Sitel India Ltd., Tata Asset Management Ltd., Center for Entrepreneurship. Mr. Noel Naval Tata has been appointed as Non-Executive Vice Chairman of the Board of Trent Ltd w.e.f. August 19, N N Tata Vice Chairman 2010. He has served as Managing Director of the Company till August 12, 2010. He has a Bachelor of Arts in Economics from University of Sussex. He has experience in Marketing, Administration and Investments. Mr. A.D. Cooper is an Independent Non-Executive Director of Trent Limited. His qualification includes Bachelor of A D Cooper Director Commerce,' Fellow Chartered Accountant, Associated Certified Management Accountant. He has experience in Finance and Management. Mr. K. N. Suntook has been appointed on the Board of Directors of Trent Limited as an Independent Non-Executive K N Suntook Director Director w.e.f. 22 August, 1995. Mr. Suntook has experience in general and legal, in particular. His qualifications are Bachelor of Arts, Bachelor of Law (Advocate), Fellow Company Secretary. Mr. Zubin S. Dubash has been appointed as a Director of Trent Limited with effect from August 18, 2010. He was appointed as an Additional Director of the Company on April 26, 2010. Prior to joining WNS, Mr. Dubash served as Executive Director of the Indian Hotels Company Ltd (Taj Group of Hotels). He was directly responsible for strategic planning, business development and finance for the Taj Group. He has also served as a Director of Tata Financial Zubin S Dubash Additional Director Services, a division of Tata Sons Ltd and was involved in advising Tata Group companies on their corporate finance requirements. Mr. Zubin Dubash holds a Bachelors Degree in Commerce from Mumbai University and a Masters in Business Administration from The Wharton School, Philadelphia. He is also a Chartered Accountant from the Institute of Chartered Accountants in England and Wales. www.fullertonsecurities.co.in Page | 5