Trent: Well poised for sharp medium-term growth

16 Jan 2024 , 12:17 PM

Recommendation: Buy; Target price: Rs 3500

Trent is one of IIFL’s top large-cap picks for CY 2024. The company has been an outlier in the Apparel Retail space, delivering strong growth in an otherwise tepid demand environment. Trent is well poised to deliver overall sales/Ebitda Cagr of 36%/37% over FY23- 28, driven largely by its value fashion format – Zudio. Continued strong momentum in this format could result in EPS upgrades, whereas new ventures and turnaround / scale-up in Star Bazaar/Zara JVs could add further upsides. Reiterate BUY rating with TP of Rs3,500. 

Zudio emerging as a star format: 

Launched in 2016 under Star Bazaar JV, Zudio has ramped up to a store footprint of 460 stores in a relatively small period of time. Sales throughput has been rising steadily in this format as well. Driven by Zudio, Trent is well poised to deliver sales/Ebitda growth of 57%/47% YoY over Q4FY23-Q3FY24 — significantly above peers in a tepid demand environment. Overall, the stock has witnessed EPS upgrades of 33-40% (FY24/25) in the previous year. 

Momentum likely to continue in the medium term: 

Analysts of IIFL Capital Services estimate that Zudio is clocking sales psf at ~Rs20,000 currently (a mature store would be at ~Rs25,000) — up from ~Rs10,400 in FY18 (Cagr of 11.6%). As the newly opened stores increase and steady performance in mature stores continues, we forecast sales psf in Zudio to grow at ~7% Cagr over FY24- 28 (vs ~30% YoY growth expected in FY24). Further, the format is well poised to scale up to a store footprint of ~1,400 stores by FY28 (vs 460 currently). Analysts of IIFL Capital Services forecast Zudio sales/Ebitda Cagr of 53%/76% over FY23- 28. 

Reiterate BUY: 

Since analysts of IIFL Capital Services upgrade note, the stock has delivered 60% return. But in terms of growth, it remains the best-placed stock in the Consumer Discretionary space; well poised to deliver 36%/37% sales/Ebitda Cagr over FY23-28. Sales psf in Zudio has witnessed sharp increase in H1FY24 and if this momentum continues in FY25, there could be further upgrades. New ventures such as Utsa, Samoh, turnaround in Star Bazaar JV and expansion in Zara JV could add further potential upsides. Analysts of IIFL Capital Services upgrade their adj. Ebitda estimates by 3%/7% for FY25/26 and reiterate BUY with TP of Rs3,500.