Trent: A worthy contender despite steep valuations

Trent, a Tata Group entity, is one of India’s leading multi-category retailers. While the headline valuation appears expensive, the business is stable and is being steered well. Therefore, it deserves attention in a weak market environment.

The path ahead

Westside: These outlets have been registering healthy same-store sales growth consistently and constitute a significant chunk of Trent’s annual top-line. Keeping this in mind, around 30 stores are likely to be added every year. To boost margin, emphasis will be laid on deriving a higher share of sales from exclusive brands.

Landmark: After achieving break-even in FY18, the focus is now on keeping overheads in check. More outlets are expected to be rolled out from next year, subject to completion of feasibility studies.

Zudio: To tap the value fashion segment, which caters primarily to price-sensitive and aspirational buyers, accelerated network expansion will be undertaken.

Star: To rationalise rental expenses and curtail impairment charges on property, the management is focusing more on the Star Market format. It expects a turnaround of Star Market stores (size: 5,000-10,000 square feet) in the next three years. Unprofitable Star Daily outlets are likely to be shut too.

A wide range of margin-accretive private label products is likely to be made available across categories such as consumables and daily use items. Supply chain processes will be streamlined as well.

Zara: In the premium apparel category, revenue traction on this front appears promising on the back of fashion awareness, increasing urbanisation and higher disposable incomes. Better product realisations under this brand aid margin accretion. Higher import duties, if any, can be passed on to the consumer too.

In the next 3-4 years, the number of Zara stores is slated to go up steadily. Most of these new outlets will be opened in metros/Tier I cities.

Tata Cliq: Considering the importance of online portals in widening the consumer base, Trent will continue to invest in this digital arm. The target is to generate Rs 100 crore in sales by FY19-end through this platform.

Scope for an uptick in Westside's gross margin is limited since the contribution of in-house brands is in excess of 90 percent. Private label products sold in the Zudio outlets will face some stiff competition from the unorganised industry players that are dominant at the lower end of the value chain.

In the food retailing segment, margins are usually very thin. Therefore, shortcomings in terms of working capital optimisation, or the inability to derive high asset turns, would lead to cash flow depletion and dent profitability. Lease costs at marquee locations in most states of India have been on an uptrend lately, which, in turn, may compress margins.

To capture a bigger pie of the fast-growing retail landscape in the country, an aggressive growth strategy has been chalked out by the management. As per the plan, about 25-30 stores will be added in each of the three formats (Westside, Star and Zudio) in the coming year or two.

The objective is to ensure that store clusters (i.e. new stores will be located in a radius of 100-200 kms of the existing ones) are created to save distribution expenses.

By striking the right balance between volume and value-driven clothing sales, managing the grocery arm efficiently through store resizing and monitoring fixed costs closely across all verticals, Trent should be able to bolster its return ratios.

In the past one year, more often than not, the stock has been range-bound, even in the midst of a market correction. At 50 times its two-year forward earnings, Trent, despite not being a value proposition in the literal sense of the term, has the right elements to hold its own when pitted against its peers.

Though chances of a sharp near-term re-rating are minimal, the moats, in our view, remain convincing enough to pick this stock for the long term.

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