Why Tata Group’s Trent Stands Out Among Its Peers

Trent Ltd. outperformed its apparel retail peers this year as its revenue rose the most and it opened a greater number of stores.

Shares of the Tata Group company have risen nearly 39 percent year-to-date. Among peers, only Aditya Birla Fashion And Retail Ltd. has gained. Others, including Future Lifestyle Fashions Ltd., Shoppers Stop Ltd. and V-Mart Retail Ltd., tumbled.

Here's why the operator of Westside stores outperformed peers:

Trent's revenue grew 32 percent in the first six months of 2019-20—the highest among its peers—while its operating margin was 17.7 percent, according to its exchange filings.

The company is well placed in the Indian fashion retail industry to outperform, led by its focus on fast fashion and value fashion, Antique Broking said in a recent report.

Westside's Sales Growth

Nearly 85 percent of Trent's revenue comes from the Westside store chain, with the subsidiary's growth boosting its performance.

Westside's same store sales growth—or sales growth at an existing location that has been in operation for at least one year—has not only been the largest but also the most consistent in the past six quarters, according to Axis Capital.

Its six-quarter average of the metric is around 10.2 percent. Westside is also the only company whose same-store sales growth hasn't declined in the same period.

That, according to Edelweiss, could be attributed to the company's focus on private labels and enhancing the shopping experience. Westside, according to the brokerage, derives nearly 97 percent of its revenue by selling private brands.

Store Addition

Trent's Westside format added stores at a steady pace and has, according to data on its website, as many as 158 stores across India as of March.

Only V-Mart and Future Lifestyle have added stores at a greater pace, Edelweiss Financial Services Ltd. said in a report. V-Mart's expansion has come at the cost of its operating margin, the brokerage said, while Future Lifestyle's grew on a low base. Edelweiss and Motilal Oswal Financial Services Ltd. expect Trent to open 30 to 35 stores in the Westside format in FY20.

Trent recently acquired retailer Zudio from its joint venture Trent Hypermarket Pvt. Ltd., which had 40 stores as of March. CLSA Ltd. expects Trent to “aggressively” increase the Zudio store count to 120 by the end of the ongoing fiscal.

Zudio's products are priced at Rs 999 or below and the store owns all the brands that it sells. The store's revenue grew 31 percent on an annualised basis over the past three years to Rs 204 crore as of March, according to CLSA.

Joint Ventures

Trent holds 49 percent stake each in joint ventures with fast fashion giants Zara and Massimo Dutti, which operate 22 and three stores in India, respectively. The two retail brands are owned by billionaire Amancio Ortega's Inditex Group.

Both the ventures, according to CLSA, are financial, and not strategic, investments.

Trent in its annual report said that revenue from the Zara JV grew at an annualised rate of 15 percent between FY15 and FY19 to Rs 1,438 crore. Massimo Dutti India, which launched in FY19, posted revenue of Rs 63 crore in FY19, according to the report.

Trent is yet to respond to BloombergQuint's emailed queries on its growth prospects and store additions.

Valuations

Trent is the most expensive apparel retailer, with Edelweiss indicating an FY20 price-to-earnings ratio of 82 times. That's at a 50 percent premium to second-placed Aditya Birla Fashion.

Analysts expect Trent to rise the least. The company, according to Philip Capital, is likely to maintain its premium valuation because of its rapid store expansion.

Ten analysts tracking the stock have a ‘Buy' rating, while three suggest a ‘Sell'.