A PROJECT REPORT ON

A comparison of the financial statements of Trent and Shoppers Stop in the retail sector

Presented at Indian Institute of Management, Bangalore On September 04, 2013

By: Group 7 Name A. Aditya Bharadwaj Abhilash Mulakala Gopi G Konark Panday Mark Pakhuongte Roll No. 1311141 1311142 1311159 1311168 1311172 Email ID Aditya.bharadwaj13@iimb.ernet.in Abhilash.mulakala13@iimb.ernet.in Gopi.g13@iimb.ernet.in Konark.panday13@iimb.ernet.in Mark.pakhoungte13@iimb.ernet.in

Executive Summary With the announcement of the allowance of 51% FDI in multi-brand retail, new dimensions have been added to the organized retail sector. With the organized retail sector currently expected to grow at approximately 30% in the next three years, the sector offers a new promise to investors in terms of share price appreciation through expected rise in FDI inflows. Due to the same, the authors intend to study the past and the current performance of two leading companies of the retail sector to assess the earnings quality that the leaders of this segment hold. Specifically, the authors aim to assess the current standing of the organized retail through the perspective of the market leaders and identify investing opportunities within these market leaders. The authors have chosen Trent and Shoppers Stop as a subject of their study. Apart from large market capital of the companies being a factor, the two companies are chosen so due to the comprehensiveness of their operations across various segments of the retail sector including clothing, food, non-durables, home dcor, books, etc. The authors intend to carry out a ratio analysis of the two companies in order to understand the companies current accounting practices, the earnings quality of the two companies, and the inventory holding period and management in the two companies. Finally, the authors intend to formulate an opinion regarding whether to Buy, Hold, or Sell the shares of the two companies based on the results of the ratio analysis.

Certificate The report represents the original work of Group 16 and does not contain any material that has been taken from any source, except as acknowledged. Sources: Sl Source Link

No Websites 1 SEBI Official website. 2 BSE India http://beta.bseindia.com http://www.sebi.gov.in

Go for the Law

http://www.goforthelaw.com/articles/fromlawstu/article40.htm

Legal Service India

http://www.legalserviceindia.com/articles/shares.htm

Company Websites for Annual Reports

http://www.mywestside.com/financial-info-reports.aspx http://corporate.shoppersstop.com/investors/annual-report.aspx

IEBF (India Brand Equity Foundation)

http://www.ibef.org/download/Retail-March-220313.pdf

India Retail Report 2013:

http://www.indiaretailing.com/irr_2013.asp

Other Source

http://www.michaelpage.co.in/websitepdf/IN_Retail_sector_report_2013.pdf

Date : 04-09-2013 Place : IIMB

Introduction According to the Global Retail Development Index (GRDI)6 2012, India ranks fifth as the most favorable nation for retail globally. Additionally, with the Organized Retail Penetration (ORP)6 in India being 5 percent, India provides a high market potential for organized retail. According to the India Retail Report 20137, the organized retail sector is estimated Rs 2,23,572 crores (USD 40.5 bn) in 2012, and holds a 7.8 percent share in the total retail market. The sector is expected to expand by 29.7 percent (CAGR) to reach Rs 4,87,423 crores in 2015. As a result, the organized retail is expected to hold a share of 10.2 percent in the next three years. Augmenting the high potential, the Government of India in 2012 approved allowance of 51 percent FDI in multi-brand retail and 100 percent FDI in single-brand retail, thereby increasing opportunities for the retail sector to connect with over 2 crores consumers in urban India, 47 percent of which are below the age of 30 years and have high consumption levels8. Within this expanding organized retail sector, Clothing and Apparel segment constitutes 33%, followed by the Food segment that constitutes 11%2. Due to the above market growth potential of the retail sector, the authors intend to assess the shareholder value that may be derived by investing in a company pertaining to the organized retail sector. For the same, it is decided to study two leading companies of the organized retail sector listed on the Stock Exchange, at least since 2008. The companies are also so chosen such that the business of the companies comprise one or more multiple segments of the organized retail sector including clothing, books, food, convenience goods, shopping goods (furniture), to name a few. The two companies hence chosen are Trent and Shoppers Stop. Trent Trent is a retail operations company that owns and manages a number of retail chains in India. Established in 1998, Trent runs lifestyle chain Westside, one of Indias largest and fastest growing chain of lifestyle retail stores, Star Bazaar, a hypermarket chain, Landmark, a books and music chain, and Fashion Yatra, a complete family fashion store. Areas of business
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Westside: With a number of stores across India, this chain offers clothes, footwear and accessories for men, women and children, along with furnishings, artifacts and a range of home accessories.

Star Bazaar: This hypermarket chain offers a wide choice of products, including staple foods, beverages, health and beauty products, vegetables, fruits, dairy and non-vegetarian products.

Landmark: A leader in the books and music category, this chain has a range of over 100,000 titles in books and music, and also stocks movies, toys, gift items and stationery.

Fashion Yatra: The stores bring quality fashion at low prices to value conscious customers in towns across India.

Shoppers Stop Shoppers Stop is an Indian department store chain that operates as Shoppers Stop, Home Stop, HyperCITY and Crossword among others. The market capitalization of Shoppers Stop is 32021 crores INR. Areas of business

Shoppers Stop: Shoppers Stop is a multi-brand retail store housing segments including clothing, footwear, cosmetics, accessories etc.

Hypercity: This chain specializes in sale of non-durable and convenience goods including staple foods, beverages, health and beauty products, vegetables, fruits, dairy and non-vegetarian products.

Crossword: The chain provides for books, music, movies, toys, gift items and stationery.

Home Stop: The chain deals in goods pertaining to home dcor and kitchen appliances.

This analysis on the two companies aims to study the following: 1. Analyze why despite similar market cap (3300 crores INR) and sales growth, there is a disparity in profits. Clearly mention profits are negative for trent and positive for SS 2. Reason out why the inventory turnover ratios of the two companies are different
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3. Understand why there exists a decreasing trend of operating profit margins over the years for both companies.

ANALYSIS Sales Growth Over Time 2008-09 Shoppers Stop Trent 129938 84973 2009-10 144896 112046 2010-11 217573 151092 2011-12 278769 184487 2012-13 317719 213203

Observations Sales for Shoppers Stop have increased by 144.5% over the study period. In the period from financial year 2008-09 to 2009-10 it increased by only 11.5% and since then has gone on to record a high growth of 119.2% over the next three years. Trents sales, on the other hand has increased at a uniform rate of around 25% a year and has recorded overall growth of 151% over the course of the study period. Sales growth for both companies follow an increasing trend over the study period although the sales of Shopperss Stop has shown a greater increase from the financial year 2009-2010 onwards. Inference Both the companies have reported nearly the same growth percentage in net sales over the study period. Organized retail sector was expected to grow at around 15% year on year during the study period (according to PWC report1) and both companies have exceeded this expectation. DuPont Analysis

Observations Profit Margin = Profit after Tax before EI/Net Sales

4.00% 2.00% 0.00% -2.00% -4.00% TRENT Shoppers Stop 2009 2010 2011 2012 2013

Asset Turnover = Net Sales/ATA

2.50 2.00 1.50 1.00 0.50 0.00 2009 2010 Trent 2011 2012 2013 Shoppers Stop

ATA/ASE
4.00 3.00 2.00 1.00 0.00 2009 2010 Trent 2011 2012 2013 Shoppers Stop

Return on Equity = Profit after Tax before EI/ASE

20.00% 10.00% 0.00% -10.00% -20.00% Trent Shoppers Stop 2009 2010 2011 2012 2013

Shoppers Stops return on equity goes up and then down wheras Trents follows a near one directional decline. Asset turnover ratios for both companies follow a very similar trend with a major increase in 2010 and a small decline from 2011 onward. Leverage Ratio (ATA/ASE) has been steady for Trent wheras for Shoppers Stop, it has increased in 2010, shown a decline in 2011 and 2012, and has increased for the year 2012-13. Inference On analysis of the constituent ratios of Return on Equity, it can be found that profit margin is the major contributor to the shape of Return on Equity.

Profit margin in turn follows this pattern because of varied profits/loss for Shoppers Stop ranging from a profit of 3596 lakhs in 2010 to a loss of 5346 lakhs in 2013.For Trent, the profits/losses have declined from a profit of 22 lakhs in 2009 to a loss of 5556 lakhs in 2012 with a small increase in the 2010-2011 period. It can be seen from the graphs that profitabilty or ROE has come from profit margin and not from asset turnover ratios or leverage ratios. Thus, we can conclude that profitability has come from margins and not volumes. Cost Structure Cost structure details of Shoppers Stop and Trent for the periods 2010-11 and 2011-12 is given below. Shoppers Stop 2012-13 Net Sales/Revenue from operations Purchases of stock-in-trade Cost of Materials Consumed Changes in inventories Employee Benefits Expenses Deduct, Finance Costs (or Interest Expense) Other Expenses/ Operating and administrative expenses Total Operating Expenses Depreciation and Amortization Expense Operating Expense/Net Sales Depreciation/Net Sales Observations Operating expenses for both companies are more than 97% of net sales. Both companies have very low percentage of depreciation to net sales(less than 2.5%).
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Trent 2012-13 213203 136918 1982 1037 17388 1598 2011-12 184487 124545 2200 -5131 15677 1035

2011-12 278768.9

317719.08

211747.94 192669.67 0 -3862 23593.27 5465.77 0 -8065.04 19966.57 4221.11

76627.01

63827.97

57082 216005 4475 101.31% 2.10%

52909 191235 4108 103.66% 2.23%

313571.99 272620.28 7907.39 98.69% 2.49% 6093.42 97.79% 2.19%

Inference For both the companies, operating expenses constitute a big part of expenses. This implies low weightage on fixed costs in the overall expense. In the retail sector, fixed assets are generally low because there is no need for manufacturing facilities or equipment. There is only a requirement for office space. The low percentage of depreciation implies very low fixed cost associated with both the companies. Hence, there is no preponderance of fixed assets. Liquidity Ratios Current Ratio and Quick Ratio Current Ratio 2008-09 Shoppers Stop Trent 1.47 1.78 2009-10 1.36 1.71 2010-11 0.57 2.08 2011-12 0.56 2.06 2012-13 0.60 1.78

Quick Ratio 2008-09 Shoppers Stop Trent 0.92 1.04 2009-10 0.82 1.01 2010-11 0.17 1.37 2011-12 0.14 1.3 2012-13 0.17 1.11

Observations Current Ratio for Shoppers Stop ranges from 1.47 to 0.56 with a sudden decrease in 2010-11. Current Ratio for Trent rises suddenly in 2010-11 and stabilizes till 2012 at around 2.06 and declines again to 1.78

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The quick ratio for Shoppers Stop has decreased from 0.92 in 2009 to 0.17 in 2013 with a sudden decrease in 2010-11. The quick ratio for Trent rises suddenly in 2010-11 and stabilizes till 2012 at around 1.3 and declines again to 1.1 Inferences Looking at the current ratios, it looks like Trent is well equipped to manage its short term obligations while Shoppers Stop cannot because the liquidity ratios for Trent are greater than one and those for Shoppers Stop are not. It is unfavourable for Shoppers Stop's short term creditors. Looking at quick ratios, it is possible to infer that Trent has atleast as much liquid assets as its current liabilities. Thus, the firm has no difficulty in paying off its current obligations instantly. Shoppers Stop, on the other hand is not in a position to pay off current liabilities with liquid current assets. Shoppers Stop The sudden difference in the current ratio for Shoppers Stop from the year 2010 to 2011 is because their current assets went down from 40168 to 35479 lakhs and current liabilities increased from 29443 to 62349 lakhs. This can be attributed to the change in accounting methods which came into effect that year. Loans and Advances, which were originally part of current assets (constituted 55% of current assets in 2010) was divided into short term and long term loans and advances in the following years. Short term loans and advances constituted only 23% of all loans and advances, and only this was included in the calculation of current assets. So, in effect there was a drop in current assets due to change in accounting methods. Secured and unsecured loans were not part of current liabilities in previous years, but short term borrowings(which form 85% of total borrowings) were included from 2011 onwards resulting in a huge increase in current liabilities for the financial year 2010-2011.

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This combined effect of decrease of current assets combined with increase of current liabilities has resulted in the drastic decrease in current ratios from 2010 to 2011. Trent In the case of Trent , current assets increased because of huge increases in cash balance from 4373 lakhs in 2010 to 32376 lakhs in 2011. Trent had a rights issue in 2010.The total proceeds were 490 crores, out of which 160 crores had been utilized towards the objects of the issue.The remaining proceeds from the rights issue were parked in mutual funds and CDs. Loans and advances, which were originally part of current assets (constituted around 48% of current assets in 2010) was divided into short term and long term loans and advances in the following years. Short term loans and advances constituted 70% of all loans and advances and were included in the calculation of current assets. Additionally, investments, which were not part of current assets in 2009-2010 were divided into current(which were included in the current assets from 2011) and non-current investments. Inventory Ratios Trent 2008-09 Inventory Turnover = COGS/Average Inventories Debtor Turnover = Net Sales/Average Receivable Avg. Debt Collection Period = Average Receivable/ADS days Avg. Inventory Holding Period = 360/Inventory Turnover days Operating Cycle = Debt Collection Period + Inventory Holding Period
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2009-10 3.41

2010-11 3.80

2011-12 3.78

2012-13 4.12

3.04

66.64

77.67

78.91

89.71

99.67

5.40

4.64

4.56

4.01

3.61

118.51

105.43

94.65

95.36

87.37

123.91

110.06

99.21

99.37

90.98

Shoppers Stop 2008-09 Inventory Turnover = COGS/Average Inventories Debtor Turnover = Net Sales/Average Receivable Avg. Debt Collection Period = Average Receivable/ADS days Avg. Inventory Holding Period = 360/Inventory Turnover days Operating Cycle = Debt Collection Period + Inventory Holding Period 78.79 66.94 54.69 59.77 63.98 75.27 63.35 51.91 56.72 60.69 3.52 3.58 2.78 3.05 3.29 102.21 100.44 129.35 118.03 109.56 4.78 2009-10 5.68 2010-11 6.94 2011-12 6.35 2012-13 5.93

Observations Inventory turnover and debt turnover ratio for both firms is high. The average debt collection period for both companies is low. Inference Inventory turnover for Shoppers Stop is higher than that of Trent. This means that inventory is not piling up and that there is a lower risk of obsolescence and it is expected that the inventory management at Shoppers Stop is more efficient. Also, it frees up cash to be used for operating needs. Trent's inventory ratio is increasing year on year, thus accomodating for increasing sales but this is not the case in Shoppers Stop. A high debt turnover ratio indicates either an efficient collection of cash from debtors or highly liquid debtors. Debtors are moving in line with sales. Since it is higher for Shoppers Stop in comparison to Trent, it indicates a more efficient collection cycle for Shoppers Stop.
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Average debt collection period is less for Shoppers Stop, indicating prompt payment by debtors. A lower average debt collection period reduces the chances of bad debt. Debt Ratios Debt to equity ratio = (Secured + Unsecured Loans)/Shareholder's Equity Trent 2008-09 Debt to Equity Ratio1 = (Secured Loans + Unsecured Loans)/Shareholders' Equity Debt to Equity Ratio2 = Total Liabilities/Shareholders' Equity 2009-10 2010-11 2011-12 2012-13

0.34

0.43

0.25

0.26

0.27

0.74

0.92

0.76

0.72

0.78

Shoppers Stop 2008-09 Debt to Equity Ratio1 = (Secured Loans + Unsecured Loans)/Shareholders' Equity Debt to Equity Ratio2 = Total Liabilities/Shareholders' Equity Observations Both the debt to equity ratios follow a V shaped curve over the study period for Shoppers Stop and follow a near straight line with a kink in 2010 for Trent. Inferences The debt equity ratio for Shoppers Stop is 0.93 which is higher for a firm in risky business like retail. It has most of its debt in short term borrowings which when expired may reduce the debt to equity ratio in future. But the present scenario infers higher risk for Shoppers shop. The Trent gradually reduced its debt to equity ratio to 0.27 which is in line with the business risk of the 2009-10 2010-11 2011-12 2012-13

1.19

0.85

0.43

0.74

0.93

2.49

1.99

1.31

1.70

2.04

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company. In conclusion, Shoppers stop has excessive debt whereas Trent has adequate debt in its books. Debt to equity ratio has decreased over the years for Trent whereas Shoppers Stops ratio has decreased and then increased from 2011. This is due to increase in share capital for Trent for the last 3 years of study period. TRENT Net profit before EI and tax Cash generated from operating activities Net cash used in investing activities Net cash generated from financing activities Cash and equivalents at the end of year SHOPPERS STOP Net profit before EI and tax Cash generated from operating activities Net cash used in investing activities Net cash generated from financing activities Cash and equivalents at the end of year Observations: Cash generated from operating activities show no correlation with Net profit before taxes for Trent whereas for Shoppers stop cash flows from operating are greater than Net profit by significant amount. 2,034 725 1,590 1,019 2,266 -9,707 2,347 -7,256 -3,831 -21,367 5,956 -17,240 17,196 -12,161 4,718 2009 -8,201 8,979 2010 5,216 11,332 2011 5,709 16,876 2012 775 2,726 2013 -3,079 10,403 1,939 4,373 32,376 30,374 20,651 10,926 -5,231 -17,609 20,771 -13,840 47,055 -13,738 20,737 -27,588 14,721 2009 55 -4,983 2010 76 99 2011 782 -3,909 2012 -5,265 -6,972 2013 -453 5,774

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Net cash used in investing activities is negative for Trent and shoppers stop for last four years and five years respectively. This shows that both Trent and shoppers stop are investing heavily for expansion of stores and retail space. Net cash from financing activities are considerably high for Trent in the last 3 years. In 2010 it issued a rights issue of 490 crores which explains the higher financing cash flows. Trents cash generated from operating activities show that there is high operating cash flow in the year 2013 but the increase in trade and other payables account which is 8315 lakhs form the major part of its cash flow statement. This is an undesirable as the payables will revert back in the subsequent years to make the operating cash flows lesser. Cash flow Origin: Trent cash flow from the year 2013 has come from issue of securities which account for 22500 lakhs and huge increase in trade payables which should create a cash outflow in the future. Shoppers stop cash flow originates from operating cash flows(which is a healthy sign) and both the issue of new securities and issue of share capital to minority shareholders which account for around 14000 lakhs in 2013. Firm Growth: From the investing cash flow analysis, Trent outflows from investing are 55166 lakhs in last three years. Shoppers stop outflows from investing for 3 years is 50768 lakhs is little lesser than Trents outflows. Both the companies are heavily investing in expansion despite net losses during last 2 years. Both the firms are funding it mainly by financing inflows by raising capital through debt and equity. Trent pays excess dividend (70% per share in 2013) in comparison to cash flow generated from operating activities which is negative when aggregated for last 5 years. Accounting and Earnings Quality: Both Trent and shoppers Stop has good overall accounting quality as the accounting changes over the years has not been significantly different. Shoppers stop accounting for depreciation of all its subsidiaries is based on Straight line method (SLM) whereas Trent uses both straight line method (SLM) and written down value (WDV) methods depending on the subsidiary. Also, it changed depreciation and useful life for a subsidiary during the analysis period.

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Earnings quality can be looked at from ratios: 1) Operating cash flow to Net profit after tax 2) Other income to Net operating profit before tax. Shoppers Stop (in Lakhs) 2012 (2442) (527) 2013 (5428) 8690

Trent (in Lakhs) Year Net Profit after Tax Cash flow from Operating 2012 (4642) (8994) 2013 (3794) 3131

Net Operating profit before tax Other Income

(9821) 5591

(5679) 6824

4276 717

1706 689

Cash flow from operating for Shoppers Stop is considerably greater than Net profit for all the years in the study period. But, for Trent CFO is lesser than Net profit after tax 2012 which shows the inconsistency between Net profit and CFO. This implies that Shoppers stop has better earnings quality than Trent with this measure. Other Income is significant to Net operating profit before tax for Trent which is undesirable as the income should be from operating activities. Shoppers stop has lower ratio of other income to Net operating profit before tax which again reiterates its better earnings quality using this measure. Overall, Trents earnings quality is low and should concentrate on the consistency of its cash flows and operating activities. Auditors report of Shoppers stop 2013 does not give a qualified opinion on non-provision of service tax for the period 2007 to 2010 on renting of immoveable properties given for commercial use, aggregating 2010.9 lakhs, pending final disposal of the appeal filed before the Honble Supreme Court, inter-alia, challenging the retrospective levy of the service tax. The amount is significant and is contingent on the outcome which should be taken into account.
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PROSPECTS OF FIRMS STOCK P/E Ratio: 2009 Shoppers Stop Trent -5.18 583.02 37.21 11148.7 2010 60.89 238.26 2011 158.03 --55.74 2012 -287.15 10.15 2013

P/E ratio tells us about the earnings quality of the stock. The lower, the better for an investor. Observations: Trents P-E ratio is more consistent with the market growth. This must be due to the fact that stock price is consistent with SENSEX growth, as the earnings has been largely constant. Shoppers Stops Net profits have fallen from 1901 to -1129 and accordingly P/E ratio has been impacted. P/E has fallen from 158 to -287. Inference: Trents stock is high priced as their net profit across the years is very bad. And even their cash flow is largely due to the income from other sources. Their higher price is evident from the fact that during 2008-09 recession, Trents stock value slashed only by half, whereas the Shoppers Stop value became one-fifth. The market sentiments are high for TATAs Trent. Dividend yield: 2012-13 Shoppers Stop Trent 0.19% 0.67% 2011-12 0.21% 0.70% 2010-11 0.23% 0.84% 2009-10 0.39% 0.74% 2008-09 0.00% 1.78%

Higher dividend yield is looked down upon by a long term investor, as an ideal long term growth-oriented profitable company should be focusing on investments to expand its operations rather than distributing the dividends.
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Inferences: The dividend yield of Trent is not consistent with respect to their operating performance, while that is not the case with the Shoppers Stop. P/B ratio: 2012-13 Shoppers Stop Trent 6.41 2.80 2011-12 5.80 2.15 2010-11 5.44 1.76 2009-10 5.15 2.88 2008-09 1.48 1.01

P/B ratio gives the idea of how a stock is being evaluated in the market in reference to its net book value. A wise long term investor would pick a stock with low P/B ratio as the stock value is bound to grow higher and yield higher returns, given the company is running the business with sound decisions. Recommendations for Stock: Though Trent has lower P/B ratio (2.80) when compared to shoppers stop (6.40), there is inefficiency in managing turnover ratios. There is no significant profit in the last 5 years. Moreover, they have been distributing dividends at the rate of 65-75%. The earnings quality is low which is of significant issue. Specifically, Trent derives a a major part of the earnings through sources other than its core business. This is worrisome. Additionally, the annual report of Trent does not provide details pertaining how the inventory is evaluated viz a viz LIFO, FIFO, or WAC accounting practice. So it is advisable for a long term investor to SELL this stock despite lower P/B ratio. Shoppers Stop stock cash flow resulted from his operating business and their liquidity ratios like Average inventory holding period and Average debtor collection period show that they are efficiently running the business. Their P/B ratio is high, their better cash flows and earnings quality suggests to keep the recommendation for a long term investor to HOLD.

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Management Discussion and Analysis: The numbers that have been established by the study of the two companies do not match those listed in the director's report and MD&A of both the companies. Profits before tax and profits after tax have both been shown as much more than what they actually are. In the case of Shoppers Stop, profits are exaggerated but in the case of Trent, a loss after tax of 3198 lakhs has been shown to be a profit of 62.26 crores. There seem to mismatches in numbers in the Trent MD&A revenue report and the calculated figures. Trent attributes the poor performance of the company to weak industrial growth in the context of tight monetary policies of the RBI and inflation. The company is trying to highlight it's poor performance as a form of recovery to the global economic crisis of 2008-09. Shoppers Stop attributes poor performances to changes in policy, inflation and the cost of skill development. This explanation is not completely acceptable as FDI in retail actually spurred growth in the sector in 2012-13 period. Also. the global economic crisis did not have that direct an impact on India as the company claims. Also, skill development in retail is a much smaller cost than in other manufacturing and services companies and cannot be used as an excuse to justify poor results. Summary and Conclusions

What are the contributions and limitations of the study?

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