Published on 7/12/2019 11:24:15 AM | Source: Motilal Oswal Ltd

Buy Trent For The Target Rs.605 - Motilal Oswal

Posted in Broking Firm Views - Long Term Report| #Retail Sector #Broking Firm Views Report #Motilal Oswal #Quarterly Result #Trent Ltd

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Encouraging insights from store visit We visit

ed two Zudio stores – TRENT’s recently started value fashion format – to explore its offerings. Key insights highlighted below:

* We came back enthused with Zudio’s value proposition – it targets the youth with stylish interiors, good fashionable/fast churning product inventory, sharp pricing and high focus on throughputs – which we believe would help in garnering healthy store revenue and profitability.

* Zudio’s capex light FOCO (franchisee owned company operated) model allows TRENT to retain operations and garner very high ROCE given the latter’s limited investment in only inventory, which has nearly 10-12x turns. The franchisee on the other hand spends on store capex and retains about 12-15% IRR.

* The FOCO model should allow Zudio to accelerate its pace of store addition. Of the targeted 100 store adds in FY20, 60 stores are already in place.

* While TRENT is richly valued, we believe that Zudio’s high growth and profitability potential can help sustain these valuations. Maintain Buy with TP of INR605/share.


Trendy products with sharp pricing

The Zudio store and products have a trendy look and feel, offer only casual wear (no formals) and is targeted at young value-seeking consumers. Despite operating on the outskirts of the city, the store sells a high proportion of stylish western wear. Yet the pricing is attractive (average price ~INR300-400) with ~65% products priced below INR499 and no product priced over INR999. While this has been partly achieved by offering lower cost polyester-blended fabric with cotton/viscose (clearly below Westside’s product quality), it is by no means sub-standard. The lower pricing has also been possible due to (a) passing-on of low gross margin benefits (~30% v/s Westside’s 55%), and (b) no marketing costs (in line with Westside).


High throughput (revenue/sqft) and quick inventory churn

Given the low gross margins, Zudio’s success lies in its strong turnover – revenue/sqft of ~12-15k/sqft (v/s industry average of INR8-10k/sqft). This is derived through a combination of strong footfalls and healthy conversion, which is ~2x v/s other retail outlets in the apparel/value fashion category that we have visited earlier. Zudio’s high fashion appeal and sharp pricing has led to an encouraging store operating metrics. Also, the store’s inventory churn is less than one month (corroborating with the CEO’s remarks in the AGM) with weekly ~15% product refresh, thus, products are changed every two months.


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