The Hindu Business Line : Trent

Shareholders with a long-term perspective can retain their shares in the company, given the growth prospects for the sector, the strong brand name and the now reasonable valuations.

Expansion plans within reach
30 stores in three years
Hypermarket format yet to gain traction

A Westside store in Bangalore. Capitalising on the emerging trend.

Shareholders can subscribe to the rights offer of Trent, which owns the Westside brand of clothing stores. The offer is at a 25 per cent discount to the current market price. In terms of execution track record, market aggression and presence in scalable formats, Trent does not fare as well as its peers, despite having a relatively strong balance-sheet. However, we believe that these factors have to a large extent been captured in the stock's current valuations. Trent, at the current market price, trades at about 30 times its likely FY-07 consolidated per-share earnings. This is at a steep discount to other listed retailers. The stock has witnessed some de-rating in recent years, as Trent has been perceived to be a slow mover in the retail space.

However, shareholders with a long-term perspective can retain their shares in the company, given the growth prospects for the sector, the strong brand name and the now reasonable valuations. Shareholders with large holdings in the stock can consider locking-in a portion of their gains by selling in the open market.

The earlier offer

Two years ago, Trent raised more than Rs 100 crore from the market by a rights offer to fund the expansion of 17 stores. However, it appears to have trailed behind its execution plans, having opened only nine Westside stores since. It did, however, foray into yet another retailing format through its acquisition of a majority stake in book-retailer Landmark for about Rs 100 crore shortly after its rights offer. The diversion of funds towards this acquisition could possibly be the reason for the company coming out with its second rights offer in such a short span.

Trent now owns 26 Westside stores, and has the distinction of selling clothes almost completely under its own private label. It opened a hypermarket store in Ahmedabad in October 2004 called Star India Bazaar, but no further stores have come up on this format till date. While it has opened a couple of Landmark stores, the total number of stores under this format, at nine, trails behind Shoppers' Stop's Crossword.

The proceeds of the rights offer will now help fund the expansion of 20 Westside stores and 10 Star India Bazaars, which will add one million sq ft to its retail space. While the nature of Trent's expansion plans are not as ambitious as its peers, the target appears to be more within reach for the conservative retailer, in the light of its earlier execution track record. The stores are to come up in the next three years and will add to its presence in Mumbai and Bangalore, while foraying into Ludhiana, Noida and Kanpur.

Growth from Westside

Given the low brand penetration, especially in women and children's apparel, Westside's private labels have managed to draw shopper interest. If the stores come up as planned, the scope for revenue growth could be significant. However, execution risks, now an industry-wide problem due to delays in mall development, remain. Westside has an arrangement to be the anchor tenant of malls developed by the real-estate behemoth, DLF, which inspires confidence, given the developer's track record in mall development.

Prospects for its Star India Bazaar, however, remain uncertain. The hypermarket does not appear to have made a mark in the manner Big Bazaar or Hypercity did almost immediately after their launch. We also expect tremendous competition in this space, one where Trent's private labels have not made significant headway. The inability to carve a market for itself in this space is a key risk to our recommendation.

Absence of disclosures on a standard parameter such as same-store sales, which adjusts revenue growth figure for new store additions, makes it difficult to evaluate the performance of the company against its peers. An improvement on its disclosures may provide an impetus to the stock.

Offer details: Shareholders are entitled to one share for every five held as on record date of May 15. The offer price is Rs 500. Equity shares outstanding, post offer, is 1.89 crore shares. DSP Merill Lynch is the lead manager to the offer.

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