Store expansion, strong Q1 numbers enhance growth outlook of pricey Trent

Top line to get a boost; margins may face pressure in near term

Investors’ willingness to give a high valuation to Trent’s stock underlines the growth potential associated with the company. It is currently trading at 34 times its FY21 estimated enterprise value (EV) to Ebitda (earnings before interest, tax, depreciation and amortisation) — which is a 27 per cent premium to its historical long-term 1-year forward average valuation. 
 
It is also higher than the valuations of many peers such as Aditya Birla Fashion and Retail, V-Mart Retail, Future Retail, and Page Industries, which are trading at up to 25 times their EV/Ebitda ratio.
 
Trent operates apparel, grocery and entertainment retail stores such as Westside, Zudio, Landmark, Star.
 
Besides the strong June quarter (Q1) numbers, what’s making investors enthused about is the company’s aggressive store expansion plan in two key stores — Westside and Zudio — in FY20.
 
Following net addition of 58 stores (25 for Westside and 33 for Zudio) in FY19, Trent plans to add around 100 Zudio stores and 40 Westside stores during the current financial year.
 
This will be supported by Rs 1,550 crore in fundraising as part of Trent’s accelerated growth strategy. Apart from store additions, the funds will also be utilised for strengthening the warehousing and supply chain, and digitisation of stores.
 
As of March 2019, the store count for Westside and Zudio stood at 150 and 40, respectively, while there were 74 for brands such as Star, Landmark, and Zara.
 

Brokerage estimates suggest Westside contributes 85 per cent to Trent’s consolidated revenue share, while Zudio makes up 8 per cent. This highlights the likely revenue boost for Trent from the planned store additions.
 
Referring to the strong 30 per cent top line growth in Q1 despite a depressed consumption environment, analysts at ICICI Securities believe the robust performance in a challenging scenario instils confidence in Trent’s business model.
 
The brokerage has a buy rating on the stock. In fact, a strong performance in the June 2019 quarter also aided the recent rally (25 per cent in the last three months, sharply outperforming peers).
 
On the flip side, though, store additions could keep near-term margins under pressure, thereby limiting earnings growth.
 
However, the expected steady growth in Westside — where it has around 97 per cent own brands (which typically earn higher margins are compared to apparels of other brands) — is likely to provide some support. Overall, any correction in the stock would entail a good buying opportunity for investors.