Trent: The trend setter

26 Oct 2023 , 10:54 AM

Recommendation: Buy; Target Price: Rs 2450

 

Trent has mastered the art of lifestyle retailing through its flagship format Westside. The company is well-poised to deliver a 30%+ sales/Ebitda Cagr over the next five years, primarily driven by its value fashion format – Zudio. Using analysts of IIFL Capital Services opportunity sizing framework, they forecast 1,400 Zudio stores by FY28 (vs 411 currently) in their base case. They base/bull/bear scenarios imply an upside of 22%/39%/3% respectively. With a high visibility on strong medium-term growth; analysts of IIFL Capital Services upgrade RECO from ADD to BUY with a TP of Rs2,450. 

A meticulously crafted business model: Through its flagship format – Westside – Trent has mastered the art of lifestyle retailing, over the years. A consistent strategy comprising various levers – fast fashion, 100% owned brands, standardised store layouts, diversified assortments, no discounting (except EOSS), among others – has helped in cultivating a differentiated positioning and a loyal consumer base. As a result, Westside has outperformed other retail formats across various parameters and delivered 9%/18% LFL and sales Cagr in the past decade (pre Covid). 

Well-poised to accelerate Zudio: Launched in 2016, Zudio has scaled up rapidly in the recent years to 400+ stores with the past two years witnessing 100+ annual store additions. Management has guided towards 200 store additions in FY24. Sales per sq.ft has grown at a Cagr of 8% over FY18-23; analysts of IIFL Capital Services estimate that a mature store is clocking a sales per sq.ft of ~Rs20,000, which is among the highest in this space. They believe that the growth journey here has just started and can continue at an accelerated pace for the next five years (at least). Using analysts of IIFL Capital Services opportunity sizing framework, they calculate Zudio’s current store potential at 1,300 stores. 

Upgrade to BUY: Currently in a sweet spot, Trent has embarked on a high growth phase, which is likely to continue for the next five years — translating into a 30%+ sales/Ebitda Cagr over FY23-28. A relatively young age profile of stores even in FY28 would imply margin expansion potential from thereon, even as growth moderates to some extent. Success in new ventures such as Utsa, Samoh and Misbu and better execution in Star / Zara JVs could result in upgrades in Analysts of IIFL Capital Services estimates. They use an SOTP methodology on FY28 estimates and discount back to derive their TP. Analysts of IIFL Capital Services base/bull/bear scenarios imply an upside of 22%/39%/3% respectively. They upgrade their RECO from ADD to BUY with a TP of Rs2,450.