The Hindu Business Line : Trent: Invest

SHAREHOLDERS can consider investing in the rights offer of Trent, which owns the Westside chain of departmental stores. The company is offering its shareholders one partly convertible debenture of Rs 900 and a warrant for every ten shares held. The equity component of the instrument, priced at Rs 400, is at a steep discount to the current market price of about Rs 700. Even if adjusted for the lower-than-market yield of 5.5 per cent on the non-convertible debenture, the offer remains attractive. We have not considered the possibility of gains if shareholders opt to convert the warrant into shares at Rs 650, as this option could be exercised only after more than four years.

The proceeds of the offer would be used to fund the setting up of 17 stores over the next three years.

Given the growing demand for organised retail formats, the rapid pace of expansion augurs well for revenue growth. Trent's plans include the setting up of more stores in the hypermarket format — large stores that sell merchandise ranging from food and perishables, to apparel and consumer durables at discounted prices. Trent's first hypermarket — Star India Bazaar — was launched less than a year ago in Ahmedabad.

While its plans in the hypermarket space are still in its infancy, Trent's presence in the departmental store format — retailing of apparel, cosmetics, accessories, home furnishings, to name a few — is well-established with about 15 stores spread across the country. The addition of stores would help increase its penetration in a rapidly growing market. Speedy execution of its expansion plans would be crucial to its gaining market share, as other retailing majors such as Pantaloon, Shoppers' Stop and Lifestyle are also on an expansion drive.

The offer document does not disclose how many hypermarkets would be opened over the next three years. The company had earlier indicated that it would open two more of such stores in FY-06. Expansion in this format is likely to shore up volumes. Margins of hypermarket stores are typically lower than that of departmental stores.

Trent, however, is likely to enjoy better margins, as it sells several of its products in Star India Bazaar under private labels, which provide a higher profitability than retailing branded products of other companies. The substantially lower prices and the fact that the products are sold by a Tata group enterprise are likely to work in its favour.

Despite the focus on private labels, Trent's operating margins have been relatively low at about 7 per cent due to high overheads. An improvement in its operating margins would be necessary if earnings growth is to keep pace with that of revenues. This assumes significance on considering

Trent's dependence on `other income' to prop up profits; `other income' currently accounts for more than half of its profits. A fall in `other income' could slow down earnings growth considerably, as was the case in FY-05. While revenues in FY-05 grew by about 50 per cent, profits rose only 11 per cent on the back of a sharp fall in `other income' and a marginal fall in operating margins.

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