Trent: Still a pricey bet on fast fashion retail, stays in top picks

The stock of fashion and lifestyle retailer Trent has been one of the biggest losers among index stocks in the past six months. The stock closed at ₹5,063 on Monday and was up about 3 per cent on Tuesday at around ₹5,200.

 

This is nearly a 38 per cent drop from its all-time high of ₹8,345 on October 14, 2024. 

 

In comparison, the benchmark Nifty 50 index is down around 10 per cent from its all-time high in September 2024.

 

The sharp decline in Trent’s share price from its all-time high is attributed to its pricey valuation and a slowdown in its revenues and profit growth in recent quarters.

 

The stock was trading at a trailing price-to-earnings (P/E) multiple of nearly 200 times at the end of September 2024, one of the highest among largecap stocks.

 

This also made Trent the most expensive stock in the retail sector ahead of Avenue Supermarts which operates the DMart chain of supermarkets.

 

The sell-off has since cooled Trent’s valuation, though it is still trading at a trailing P/E of 121x.

 

The sharp rise in Trent’s valuation happened due to a rally in its share price through 2023 and 2024. Between January 2023 and September 2024, Trent’s share price rallied nearly 533 per cent, considerably higher than Nifty 50 which saw a 46 per cent rise. 

 

The rally in the Tata group company’s stock was driven by a surge in revenue and profits. 

 

In the past three years, Trent’s consolidated net sales nearly quadrupled. On a trailing 12-months (TTM) basis, net sales increased from ₹4,075 crore for the period ended December 2021 to ₹16,125 crore for the period ended December 2024.

 

In the same TTM period, consolidated net profit (adjusted for exceptional gains and losses) jumped nearly nine times from ₹157 crore in the period ended December 2021 to ₹1,486.6 crore in the period ended December 2024.

 

This also makes it one of the fastest-growing companies post pandemic. The growth fuelled the unprecedented rally in the stock.

 

Trent’s market capitalisation jumped from ₹37,859 crore at the end of December 2021 to ₹2.69 trillion at the end of September 2024. Since then, it has declined to ₹1.8 trillion on Tuesday.

 

The company’s growth largely came from the success of its fast fashion retail format Zudio, which has become one of the country’s most popular fashion brands within a few years of its launch.

 

While Trent remains one of the fastest-growing retailers in the country, its growth has decelerated in recent quarters under the weight of a slowdown in consumer demand.

 

The company’s consolidated net sales was up 34.3 per cent year-on-year (Y-o-Y) in the third quarter of FY25, down from 50.5 per cent Y-o-Y growth in the third quarter of FY24, and 50.1 per cent Y-o-Y growth in FY24.

 

Similarly, its adjusted net profit was up 32.8 per cent Y-o-Y in the third quarter of FY25, down sharply from 124.2 per cent Y-o-Y growth seen in the third quarter of FY24 and 133 per cent Y-o-Y growth in FY24.

 

A slowdown in consumer demand has forced the company to close non-performing Zudio stores. It has also scaled down its new store addition plans.These are likely to translate into lower revenue and earnings growth than what was seen in recent years. This in turn will translate to a lower P/E multiple.

 

At its current valuation, the stock is trading at a price-to-earnings growth (PEG) ratio of 2.75x, more than twice its 15-year average of 1.22x. This raises the risk of a further derating in the stock.

 

Brokerages, however, remain upbeat about the stock and Trent is one of their top picks among retailers.

 

“Trent’s growth in the third quarter of FY25 was in-line and healthy, given median sales growth of 29.8 per cent Y-o-Y for peers (VMart, V2Retail, Style Baazar, Vishal Megamart). Zudio continued to differentiate itself in fast fashion as competition is yet to grasp the segmental know-how,” writes Karan Taurani of Elara Capital in his recent report on the company.

 

The brokerage maintains a ‘buy’ rating on the stock with target price of ₹8,300, nearly 50 per cent higher than its current market price.