If you think Trent’s rally from ₹500 a share in September 2019 to ₹7,600 in September 2024 has resulted in irrational valuations, this article is for you.
We often categorise investments based on factors such as valuation, fundamentals, management and story. But once in a while there comes a stock that defies all of these and showers investors with remarkable returns. Trent is one such stock.
Let’s dig deep and see whether the surge in Trent’s stock aligns with the company’s actual performance.
1. Valuation
The stock is trading at a price-to-earnings ratio of 216, well above its 10-year median PE ratio of 164.6.
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Wait a minute! The 10-year median is 164.6, which means the stock has been trading at a PE ratio of around 150 for a decade. That’s something worth looking into. How has the stock managed to trade at such a high valuation and still grow at a 10-year compound annual growth rate (CAGR) of 50%?
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Well, the stock price has moved in tandem with profits. Trent’s profit grew at a CAGR of 59% over the past 10 years while its sales grew at a CAGR of 18%. Profit growth is currently in the range of 100%. Earnings per share (EPS) rose 135% to ₹29.48 in FY24, excluding exceptional gains. With these gains included, EPS works out to ₹40.39. This pace of growth is expected to continue in the near future.
2. Growth
In the words of Bruce Lee, “Long-term consistency trumps short-term intensity.” Trent has delivered standalone revenue growth in nine of the past 10 years (revenue fell in the pandemic year 2020-21) and standalone EPS growth in seven of the past 10 years.
Before 2018 the company faced retail cyclicality, seeing fluctuations in revenue and EPS growth as it earned 96% of its standalone revenue from Westside, which caters to urban Indians looking for premium apparel.
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Growth rates started accelerating in 2018, the year it opened the first independent Zudio store, which only sells in-house brands. During this time, Trent turned Westside into a pure-play private-label retailer.
The company prioritised consistency over intensity. Initially, it opened only a few stores and measured their performance and operating efficiency. As it moved to private-label-only stores with Zudio and Westside, it had full control over the supply chain, from procurement, design and production to in-store customer experience. It used this advantage to churn out quick fashion efficiently.
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Trent then increased its store count from 314 in FY20 to 882 in FY24, at a CAGR of 37%, with Zudio stores opening at a CAGR of 63% between Q1FY21 and Q1FY25. As of 30 June 2024 it had 559 Zudio stores, more than twice the number of Westside stores (228). During Q1FY25 it opened 6 Westside stores and 16 Zudio stores in 12 cities.
Despite accelerating new store additions, like-for-like sales per sq ft in fashion and lifestyle concept stores grew 10% in FY24. Today, Zudio alone accounts for 30% of Trent’s revenue and the operating profit margin has increased from 6.87% in FY23 to 9.86% in FY24. This growth came at a time when India’s retail market was subdued, highlighting Trent’s consistency.
3. Resilience to competition
Trent’s margins and revenue have continued to grow despite strong competition from top retailers that introduced quick-fashion brands targeting the youth. Aditya Birla Fashion and Retail launched Style-Up in 2019, Reliance Retail launched Yousta in August 2023, and Shoppers Stop launched InTune in May 2023.
While all these companies are using a mix of private-label and third-party brands, Trent is harnessing a private-label-only approach to beat the competition. Its FY24 Ebitda margin of 16.2% is almost twice that of Reliance Retail’s (8.5%). This shows that despite Reliance’s aggressive store expansion (it’s adding more than 1,800 stores in a year), Trent’s conservative approach is delivering better profitability.
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Trent also beats the competition on pricing. While many fashion and lifestyle retailers offer discounts that affect their margins, Zudio and Westside sell at full price. In its FY24 annual report, Trent said, “Customers subconsciously attach more value to full-priced offerings and correlate full price to a strong brand. Consequently, we stay away from discounting and also avoid active marketing spends.” Despite this, revenue has grown consistently. Trent has full control over price, too, as its private labels are only sold in its own stores, and at Tata Cliq and Tata Neu online. So far, the numbers show consumers are willing to pay full price.
D-Mart uses an ‘everyday low prices’ approach in which there are no heavy discounts during the festive season or on special days. Instead, it factors the discount into its everyday prices, which helps it keep profit margins stable, like Zudio’s.
4. Replicating Zudio model with StarBazaar
Having set the profits rolling for Zudio, Trent is now looking to replicate the model with StarBazaar, which has 72 stores in 10 cities and will focus on private-label products. It is not looking to enter quick commerce, but will face stiff competition from Avenue Supermarts and Jio Mart.
It remains to be seen if the Zudio model works in stores with a different format, but analysts are excited about StarBazaar’s potential recovery. Brokerage firm Nuvama Institutional Equities believes StarBazaar warrants a much higher valuation multiple as its profitability and scale should be evaluated on the lines of DMart and Zudio.
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Zudio uses the franchise-owned company-operated (FOCO) model, in which the franchisee bears the capital expenditure for store infrastructure. Avenue Supermarts on the other hand buys the land and builds a store. D-Mart has only closed two stores to date, only to convert them into e-commerce fulfillment centres. It will be interesting to see how a mix of the two models reflects in profit margins.
If StarBazaar does succeed, it has greater potential than Zudio as food and grocery accounts for nearly 65% of India’s retail market, while fashion and lifestyle account for less than 10%.
5. Valuations compared
Trent’s PE ratio of 216 is similar to Shoppers Stop’s 215 but higher than Avenue Supermarts’s 129. However, Trent has faster profit growth than the other two. Other than this, all valuation multiples favour Avenue Supermarts.
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D-Mart’s parent firm is also debt-free, with a higher 10-year return on equity of 14% than Trent’s 10%, and a lower price-to-book ratio of 18.3 than Trent’s 60.9. If Trent can replicate D-Mart’s success, its growth will justify the high valuation.
The takeaway
Right now, momentum is strong for Trent. The stock has a relative strength index of 77, which hints that it may be overbought. But it also saw a bulk deal in which Dodona Holdings sold 10.73 lakh shares to Siddhartha Yog, founder of Xander Group, for ₹7,553 a share. Xander Group is a global investor that focuses on emerging markets. This bulk deal comes ahead of Trent’s inclusion in the Nifty 50 Index, which could attract inflows of around ₹4,195 crore as many domestic and foreign institutional investors are interested in this multibagger.
Trent’s future EPS growth could continue to influence its stock price. It remains to be seen if the stock can maintain the rapid growth of the past five years.
For more such analysis, read Profit Pulse.
Note: We have relied on data from www.screener.in throughout this article. Only in cases where the data was not available have we used an alternate but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.
Puja Tayal is a seasoned financial writer with more than 17 years of experience in fundamental research. She brings a good blend of comprehensive, well-researched insights into a company’s work in her articles.
Disclosure: The writer and her dependants do not hold the stocks discussed in this article.
