Consumerism to drive growth

Updated: Oct 30 2005, 05:30am hrs
Retailing in India is gaining ground. As of now, the organised retailing industry in India constitutes only 2% of the entire retailing industry indicating immense growth potential.

Trent Ltd, a Tata Group company, with an annual turnover of Rs 234.48 crore has managed to show a growth of 51.15% for the year 2005. The company has managed to grow at a compounded annual growth rate (CAGR) of 35% over the last five years.

Trent concentrates on lifestyle retailing, marketing its products through its retail outlet "Westside". The company, in the past has developed its own branded products, which are sold through its retail outlet. It has a presence in homemade, readymade, fashion clothing to cater every class of customers. Trent has launched low-price products targeting low-income group, while marketing its products in small towns and other parts of the country as well.

Industry outlook

The Indian retailing industry has more than 50 million outlets, but, the country lacks anything that can resemble a retailing industry in the modern sense of the term. The size of the retailing industry is expected to be around Rs 9,30,000 crore. Out of this organised retailing is around Rs 35,000 crore and the segment is growing at around 7% CAGR.

"The growing Indian middle class" - a study conducted by NCAER estimates that the Indian middle class has grown over two and a half times to 57 million in 2001-02 from 1995-96 and is expected to cross 92 million by 2005-06 and 153 million by 2009-10. This burgeoning middle class is expected to accelerate the consumption in a big way.

Changing demography - average household income in urban areas has grown at a 5% CAGR (Compounded Annual Growth Rate) over the last decade. This means more purchasing power and in turn, more scope for improvement in consumption. Also the economy is undergoing a change in the age profile of the spenders. The total numbers of young spenders is expected to increase.

Easy availability of cheap credit has also fuelled the credit growth trajectory. With a sharp reduction in the retail lending rates, banks are focussing on the retail segment. This will help in reviving the latent consumer demand.

Change in consumption pattern - currently food and grocery items constitute around 50% share of the consumer's wallet. While this share is expected to go down as rising income levels, changing aspiration levels and an attitudinal shift will propel consumers to spend more on other discretionary items. This can also be attributed to the increased nuclearisation of families.

Strength

Trent has built its own brands and products targeting every segment of market and gradually entering into low-price products and speciality products, through aggressive advertising and marketing. The advertising and sales promotion expenses for the year ended 2004-05, have gone up by 56.81% at Rs 21.17 crore, from 13.50 crore last year 2004-03, which accounts for 9% of net sales of the company.

Company with its recent right issue has raised funds and aggressively funded its expansion plans. It has deployed 15.85 crore towards the purchase of fixed assets, grew by 40% as compared to last year's 11.32 crore. The company has been able to garner success with the launch of its hypermarket store "Star India Bazar" and other new Westside stores, at Indore, Mumbai Bangalore and Baroda.

Being one of the Tata group companies, it enjoys support from group and goodwill in the market. This holds good for raising money to fund company's future expansion plans

Financials

For the quarter ended September 2005, Trent has recorded 60% increase in net sales at Rs 86.63 crore against Rs 54.09 crore in the corresponding period last year, expenditures have followed the same trend and have grown by 57% at Rs 78.63 crore. The operating profit margins have improved marginally at 12.8% as compared to 12.40%, however, the operating margins have come down against 15.60% for the year ended March 2004. The net profit and EPS has gone up significantly by 56% and 48% at Rs 5.74 crore and Rs 4 respectively.

Trent is currently traded at Rs 737, a growth of 116% over the last one year. With a P/E of 46x, Trent appears fairly valued when compared to its peers.