Commerce minister Anand Sharma with Trent vice-chairman Noel Tata and Tesco CEO Philip Clarke in New Delhi on Tuesday. (PTI)

Mumbai, Dec. 17: Walmart may have chickened out but Tesco is poised to make a great leap of faith.

The world’s second largest retailer measured by profits has finally overcome its reservations about investing in India’s front-end retailing market by agreeing to pick up a 50 per cent stake in Tata-owned Trent Hypermarket Ltd (THL). THL runs hypermarkets under the Star Bazaar brandname in four states, which stock Tesco products under an arrangement.

“Tesco is making an application to the Foreign Investment Promotion Board. If the application is successful, the intent would be to enter into a partnership where Trent and Tesco will each own a 50 per cent stake in THL,” the Tata group said in a press release.

It is not clear how much Tesco plans to invest.

“The application envisages a minimum foreign direct investment in line with the applicable multi-brand retail trading policy,” the release said.

Under rules framed in September last year when the UPA government decided to allow FDI in multi-brand retail, foreign investors were required to invest at least $100 million in the retailing venture.

Reports from Delhi, which could not be confirmed, said Tesco had submitted an application that envisaged an investment of $110 million (about Rs 700 crore).

THL operates 15 discount hypermarket stores under the Star Bazaar brandname.

Trent vice-chairman Noel Tata said: “The application is a positive step forward in the relationship between the Tata group and Tesco. We believe that our understanding of the Indian market coupled with Tesco’s unparalleled global retail expertise will allow us to leverage the tremendous potential of the market to the benefit of all stakeholders.”

At present, Trent Hypermarket has a franchise and a wholesale supply arrangement with Tesco Plc and its wholly-owned Indian subsidiary, Tesco Hindustan Wholesaling Pvt Limited (THWPL), respectively. The exclusive franchise agreement grants Star Bazaar access to Tesco’s retail expertise and technical capability.

“The proposed partnership will operate and build on the existing portfolio of Star Bazaar stores in Maharashtra and Karnataka,” the release said. For now, Tesco may give Gujarat and Tamil Nadu, the two other states where it operates, a miss because of their stand on multi-brand retail.

“The application envisages a minimum foreign direct investment in line with the applicable multi-brand retail trading policy,” it added.

Trent Hypermarket Limited recorded a 21 per cent increase in total revenues at Rs 785.19 crore in 2012-13 from Rs 649.51 crore in the previous year. But it reported negative earnings before interest and tax (EBIT) of Rs 64 crore.

“The Star Bazaar business is still a mid-sized operation… this business continues to warrant significant investment of capital and is expected to take a few more years before the shared services and central costs get covered by the contribution generated from stores. Also, in the near term the muted same store sales growth being registered by this format is a concern, especially in the context of continuing cost pressures,” THL’s parent Trent Limited said in its annual report for 2012-13.

As Tata and Tesco cement their relationship, others seem to have gone the other way. In October, Walmart snapped its ties with the Bharti group. The $466-billion Beast of Bentonville broke up its seven-year-old joint venture with Bharti Enterprises, signalling its intent to go it alone. Walmart will continue to operate in the wholesale retailing space after buying out the Bharti group’s 50 per cent stake in the 20 cash and carry stores they ran in the country.

Walmart has no plans to invest in multi-brand retailing as it feels severely circumscribed by government rules on foreign investment.

Many others have felt the same way but Tesco now seems to have had a change of heart. This could have had something to do with a meeting that Tesco CEO Philip Clarke and Noel Tata had with commerce minister Anand Sharma in May.

Tesco, the £72-billion British retailer, has been going through turmoil in the past year that forced a major overhaul in its top management. It has decided to exit the big-ticket markets in the US and Japan, written down the value of its UK property, cut back on its expansion drive in China, and announced a goodwill impairment of its businesses in Poland, Czech Republic and Turkey.

Tesco was formed in 1919 by a Polish emigrant Jack Cohen who started selling groceries from a stall in Hackney in London’s East End.

In the UK retailer’s annual report for 2013, Philip Clarke had said: “Our model in India is to work with the Tata group, and we are unable to commit our own capital under current regulations. However, the model works, we like our partner and we are learning a lot about the market.”

FACT SHEET

● Tesco applies for permission to pick up 50% stake in Tatas-owned Trent Hypermarket

● Reports indicate Tesco plans to invest $110 million, slightly above the $100 million threshold under new rules framed in September last year

● It will be the first FDI in multi-brand retail since Centre lifted the ban in September last year

● Trent Hypermarket runs a discount hypermarket format under the brand name Star Bazaar

● Fifteen Star Bazaar stores in the country: three in Mumbai, four in Bangalore, two in hmedabad and Pune, one each in Aurangabad, Surat, Chennai and Kolhapur

● Trent, THL’s parent, runs Westside and Landmark retail stores in the country