Street positive on Trent after a strong Q1 results, sales trajectory

Aggressive expansion and healthy like-for-like growth led to the third consecutive quarter of Rs 2,000 crore plus revenues.

Ram Prasad Sahu reports.

Riding on strong June-quarter numbers and positive brokerage outlook, the stock of retail major Trent hit a fresh all-time high on Monday (August 14).

The stock has gained 14 per cent in five trading sessions.

Continuing the trend of strong revenue growth over the last few quarters, the company posted 53.5 per cent year-on-year (Y-o-Y) growth in top line to Rs 2,536 crore in the June quarter (first quarter of financial year 2023-24 or Q1FY24).

The growth rate, which was 10-15 per cent higher than Street estimates, came in at 22 per cent, on a sequential basis.

Aggressive expansion and a healthy like-for-like growth led to the third consecutive quarter of revenues over Rs 2,000 crore.

Growth over the last four quarters has been in the range of 53-78 per cent.

Most of the growth in this quarter was on account of expansion of its fashion retail segments of Westside and Zudio.

It was also due to robust show by new categories and like-for-like growth of 12 per cent.

While the company expanded Zudio’s presence by adding 40 stores in Q1FY24, it added six stores to the Westside network.

Most brokerages highlight that the consistent growth even in the midst of a consumption slowdown has helped the company outperform peers over the last few quarters.

The company has posted a strong 35 per cent annual growth over the last four years.

Aliasgar Shakir and Tanmay Gupta of Motilal Oswal Research said, “While the discretionary category is seeing a challenging demand environment, with peers seeing a decline in same store sales, Trent has been a standout with a record 12 per cent like-for-like growth.

“Further, despite adding stores aggressively, the company has observed limited balance sheet risk or weakness in operations.”

The brokerage has increased its revenue growth estimates by 7-9 per cent over the next two years but has cut the operating profit estimates.

It has reiterated a buy rating on the stock.

The company’s Star format has seen improvement with operating revenues growing 33 per cent Y-o-Y and most of the gains coming from like-for-like growth.

About a third of the revenues in this format comes from general merchandise and apparel.

Even as revenue growth has beaten expectations, the gains from this are yet to fully reflect in the operating performance.

A higher proportion of the lower margin Zudio format and increased cost from store expansion/rentals dragged down gross as well as operating profit margins.

While profitability at the gross level was down 480 basis points (bps), it was lower by 400 bps on the operating front.

Rental cost as a proportion of sales came in at 11 per cent (versus 8 per cent in Q4FY23 and 10 per cent in Q1FY23).

This was due to a possible renegotiation in rental prices or ramp-up of stores in premium locations, said Garima Mishra and Shubhangi Nigam of Kotak Institutional Research.

Four-year annual operating profit growth of 22 per cent was lower than revenue growth on account of strong addition of new stores.

The brokerage has raised its FY24-26 revenues by 11-32 per cent due to strong Q1 performance and sustained growth momentum.

They believe that new concepts in ethnic wear and innerwear may keep the revenue trajectory higher for long.

It has upgraded the rating to add from reduce.

The stock, which has gained 31.5 per cent over the last three months, is trading at over 70 times its FY25 revenues.

While this is at a premium to market and the sector, brokerages believe it is justified.

Trent’s valuation implies a premium, but its success with Westside’s scale up underpins our belief that it can replicate the same at Zudio, said Nuvama Research.

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