Brokerages expect Trent to be on growth runway after strong Q1 results

A CUT ABOVE Improved presentation in new categories, JVs/associates to gussy up retail major's consolidated performance

Thanks to a sharp surge in share prices, Tata Group-owned retail major Trent, on Wednesday, entered the coveted list of top 100 companies by market capitalisation, with its value crossing the Rs 50,000-crore mark.

In addition to the outperformance in the lifestyle apparel business, growth momentum in the emerging segments and an upbeat trend in the general merchandise arm StarBazaar were the other highlights for the April-June quarter (first quarter, or Q1) of 2022-23 (FY23).

After the results, brokerages revised their operating and net profit estimates for FY23 and 2023-24 by up to 9 per cent to factor in the strong Q1 showing. They are optimistic about its prospects, given the aggressive store additions and its cash-flush status.

Before correction over the past few trading sessions, the stock had gained about 22 per cent since July. Further gains will depend upon its ability to scale up its businesses across formats and improvement in margins.

While most apparel retailers posted strong results, Trent’s performance was striking. Standalone revenue on a pandemic-hit base rose fivefold, with recovery at over 215 per cent of Q1 of 2019-20 (FY20), or pre-Covid levels. This was ahead of peers such as Pantaloons, which saw 15 per cent growth. Even on a sequential basis, revenue growth was a strong 39 per cent on the back of a revival in consumer sentiment.

Given the low base, even when viewed from a three-year compound average rate basis, growth at 29 per cent was the highest across fashion retailers. Pantaloons posted 5 per cent growth, points out Ambit Capital.

The growth over the three year period was led by store additions and facilitated by a 24 per cent like-for-like growth, compared to Q1FY20 in Westside. This format accounts for over 72 of overall revenue.  

Fashion concepts (Westside/Zudio) reported their highest-ever quarterly revenue in Q1FY23. 

Research analysts Bharat Chhoda and Cheragh Sidhwa of ICICI Securities estimate that Westside crossed the Rs 1,000-crore-per-quarter revenue mark for the first time in Q1FY23, with an annualised revenue per square feet at Rs 13,500. This was 28 per cent higher than the average run rate.

Zudio has grown faster, given the strong acceptance in tier II and III cities, with store count and revenue growing sixfold each over the past three years. What should assist incremental growth for the apparel retailer are the emerging categories of beauty and personal care, innerwear, and footwear accounting for more than 15 per cent of standalone revenue.

The company now has a network of 450 fashion stores across the country (more than double pre-Covid-19 numbers). The management has highlighted that the performance of the newly added stores has been encouraging and in line with expectations.

While the top line saw impressive growth, higher input costs and expenses weighed on profitability. Pressure on the company’s gross margins were much higher than expected as the metric registered a fall of 430 basis points (bps) over the year-ago quarter and was flat on a sequential basis at 49.3 per cent. The decline was on account of a higher share of Zudio stores - the value fashion arm of the company. The lower gross margins could possibly be due to limited price hikes in the Zudio format as it continues to price products at sharper price points (less than Rs 500), notwithstanding significant increase in cotton prices, observes ICICI Securities.

While operating profit was higher than estimates, factoring in the top-line performance, margins at 18.4 per cent were 100 bps lower than consensus estimates. The company had posted an operating loss a year ago; sequentially margins were 550 bps higher.

In addition to the performance, the Street will also track how the consolidated operations perform.

Trent Hypermarket (a 50:50 joint venture of Trent and British retailer Tesco Plc), which operates the Star format stores, registered its highest-ever quarterly revenue, clocking 18 per cent annual growth over Q1FY20. The company indicated that the format is witnessing positive signs of improvement in store-level economics and it could become an additional growth engine.

Most brokerages have a ‘buy’ rating on the company.

Axis Capital believes the company is well-placed to perform fine, driven by success in the Westside concept (exclusive brands at competitive prices), ramp-up of value-fashion format Zudio, sustainable margins (led by superior store metrics, supply-chain optimisation, and diligent focus on cost rationalisation), and bolstered by a healthy balance sheet.

While target prices range between Rs 1,500 and Rs 1,650 and offer decent returns at the upper band, investors should await better entry points.