HDFC Sec: Hold Trent: Growth and strategic alliances

Trent: Growth and strategic alliances
Trent is on an aggressive growth path. The company intends to open at least 10
Westside stores every year. Between FY10 and FY13, we expect sales and adjusted
PAT to increase at a CAGR of 26.5% and 32.9% respectively. The business
continues to focus on high margin private label segment with ~85% share of
private labels. Trent has struck alliances for most of its subsidiaries. It has an
alliance with Zara, Sisley and Tesco. We initiate coverage with a HOLD and a price
target of Rs.1120.
Subsidiaries: Hypermarket leading the way…
As of 31 March 2010, the company had 5 Star Bazaar hypermarkets. During FY10,
the company did sales of Rs.2752 million with EBITDA of (-) 213 million. The
company plans to invest RS.2750 million to ramp up this business. By March 2013,
the company will have 29 stores, mostly in metros and tier I markets. We expect it
to do sales of Rs.11400 million by then. Star Bazaar’s supply chain is being
managed by Tesco implying efficiencies in supply chain. We attribute a value of
Rs.412 per share to this subsidiary alone on the basis of P/sales of 1x for FY12.
The company recently sold 24.99% stake in Landmark to TVS PE fund for Rs.650
million. During 2009-10, revenues of the company were Rs.2285 million. Landmark
is the market leader in Chennai. However, its stores in Hyderabad are yet to gain
traction. The company is rationalizing costs and format according to clientele in
different markets. We have ascribed a value of Rs.124 per share to this business
on the basis of the recent transaction.
Westside will fund its own operations…
The company’s flagship business, Westside, is profitable. Since FY08, raw material
costs as a percentage of sales have fallen by 410bps. However, during the same
time period, operating expenses increased by 600 bps. Most of this increase was
led by increase in rentals which went up by 287 bps. Because of a private label
strategy, company’s advertising and promotion costs are higher than its peers. We
expect this trend to continue. However, rental income plays an important role in
sustaining EBITDA margins. As much as 47% of company’s EBITDA margin is
attributable to rental income alone.
Valuation
On a EV/EBITDA basis, Trent is the most expensive company among its peers.
However, the company’s hypermarket format will turn out to be a value accretive
opportunity. We expect Star Bazaar to cross Rs.11 billion in sales with close to 30
stores in FY13. This implies revenue CAGR of 58.7%. However, the price discounts
all the positives and we initiate coverage with a HOLD rating on the stock.