Trent: Window shopping

The tie-up with Tesco doesn't bring the retailer any meaningful benefits.

The exclusive franchise alliance with the world’s third largest grocery retailer, Tesco Plc, does not bring any immediate financial benefits to the Tata-owned Trent. Over the longer term, however, the company should gain from Tesco’s technical expertise, for which it is paying a fee. And of course, the retailer can source from Tesco’s cash and carry operations in India; in effect, it will have access to a wider range of products.

Also, Tesco will not be supplying goods to any of Trent’s hypermarket competitors in the country. So, to that extent, Trent has an exclusive deal with Tesco. However, it’s not that the retailer will receive any preferential pricing for its purchases from Tesco.

As such, even if the foreign direct investment rules are amended at a later stage to allow foreign players to set up front-end retail operations, it’s hard to see how Trent could benefit significantly from such an alliance.

Trent, which today runs 50 stores across the Westside, Star Bazaar and Landmark formats, has not been in a hurry to roll out stores despite having had the financial resources to do so.

However, the management has said 50 hypermarkets will be opened over the next three years. Besides, the retailer has entered into arrangements with real estate companies and should also be rolling out more Westside and Landmark outlets.

Revenues for Trent grew at just 13.7 per cent to Rs 514.16 crore in the year to March 2008 with operating profits falling by about 50 per cent to Rs 15.22 crore and the net profit remaining flat at Rs 32.86 crore, driven by higher other income. The slow growth in the top line is not encouraging, given that costs -- especially for real estate -- are not coming off.

The company’s earnings per share fell to Rs 17.89 in FY08 from Rs 20.37 in FY07. Trent recently raised Rs 160 crore through a rights issue and Rs 90 crore through a preferential issue to promoters. There’s little reason for the stock to have rallied 10 per cent in Tuesday’s session. At the current price of Rs 546, the stock trades at an expensive 26 times estimated FY09 earnings.