Tesco’s stake buy in Trent Hypermarket gets CCI approval….BUY Trent tgt Rs 1300/-

This morning the papers carried the news that Competition Commission of India has approved Tesco’s stake buy in Trent Hypermarket.  Tesco proposes to buy a 50% stake.  Trent Hypermarket Limited (THL) runs the Star Bazaar chain in India retail sector.

Trent is a ~Rs3400 crore market capitalization company, or Westside (as the stores are known) is the lifestyle retail chain of Tata group, India’s answer to Marks & Spencer. The last year has seen the company recover from its 2012 performance gradually.  Margins have shown improvements, input costs have been contained and while the number of new stores has slowed down net sales show a good 15-20% growth range, which is good given the macroeconomic environment.  It also helps that the borrowings of Trent are not too high and the debt equity ratio is low, about 0.15% which again is very good given the current context.

For the quarter ending March 2014 the company reported standalone sales of Rs 298.01 crore and a Net Profit of Rs 24.96 core, thus maintaining the even trajectory of growth it has been showing over the last two quarters. In the quarter ending December 2013 they had a sales turnover of Rs 282.43 crore and a net profit of Rs 23.49 crore.

The Tesco JV is expected to add to earnings in three to five years but for Trent is a positive as it will considerably strengthen its balance sheet.  Trent will get about Rs 850 crore odd investment into the company. Therefore, the capital requirement for the hypermarket business is taken care of including the backend. The 50-50 JV will bring Tesco into the market.  As the business scales up, there are lots of things which Tesco can bring it to the table, primarily on the private label business. The private labels will be more margins accretive, they can drive sales and this will change the margin profile.  But for Trent is will mean a stronger balance sheet on the back of which it can grow its lifestyle retail business better.

Britain’s supermarket giant Tesco has recorded a major drop in profits for the last fiscal, but has pinned its hopes on India for a revival of fortunes. Tesco posted 6 percent fall in the group’s trading profit to 3.3 billion pounds in the year to February 22. In the UK, profits fell 3.6 percent to 2.2 billion pounds and sales dropped 1.4 percent. They are betting big on their India venture.  The company said that it has established partnerships with CRE in China and Tata in India which provide continued access to two of the world’s most exciting markets, consistent with a sustainable level of future investment.

Outlook and Valuations

Organised business is expected to report a 25% growth over the next 5 years, Trent, with its Westside stores is already doing a 15-18% kind of growth, expecting the FY15E EPS to be in the range of Rs28 BUY Trent with a target of Rs 1300/- with a years perspective.

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