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Ramp-up phase round the corner

We interacted with Trent CEO Mr. P Venkatesalu Highlights: i) Zudio as a format has stabilised, and the company is looking at its aggressive ramp-up (highlighted at AGM too). ii) The online strategy for Westside will be driven via Tata Cliq, own website & app (app in development), and Tata’s super app. No plans to launch on marketplaces. iii) Targeting ramp-up in grocery having found the right model for Star Bazaar. Booker’s expansion will leverage Star’s network.

We believe Trent has established the viability for Zudio, and expect it to drive the company’s next leg of growth. We maintain our target multiple and an unchanged TP of INR1,198. Weak store economics for Zudio and e-commerce are the key risks. Maintain ‘BUY’.

Zudio: Format established; expansion to leverage existing network

Trent management highlighted that Zudio has moved to the next phase of growth, out of the testing phase. This is visible in the strong expansion seen in FY21 - Zudio’s addition of 68 (including 15 fitted-out stores to be opened) was the highest in the history of the format. Going forward, Trent is targeting addition of 50–70 stores/year. Another aspect: on Zudio’s addition would continue to leverage Westside’s supply chain and expansion into new geographies will be in the vicinity of the Westside network. Trent remains clear that is will not look at aggressive advertising for the format.

Omni approach for Westside; grocery scale-up

Initially Westside’s collection was available only on Tata Cliq. In FY21, Trent launched Westside.com, which helped it clock 5% online share--a first. Trent also plans to leverage the Tata Digital platform, which is slated to go live soon. The Westside app is expected to be launched over the next few months. Management is clear it does not want to list Westside’s collection on third-party marketplaces. On its grocery business, management is confident about/comfortable with Star Bazaar’s economics. On Booker, expansion will be on the back of an integrated back end with Star Bazaar, a la Westside-Zudio; hence incremental margins be a flow-through.

Outlook and valuation: Growth lever cranking up; maintain ‘BUY’

Trent’s success over the past decade has been driven by customers’ affinity to Westside, which has helped it drive industry-leading SSSG. We expect Zudio to gather pace and the large value retail opportunity to drive Trent’s next leg of growth over the coming decade and potentially outpace Westside.

Hence, we maintain the target EV/EBITDA for the standalone business (Westside + Zudio) at 45x FY23E EBITDA and the TP at INR1,198. Valuations imply a premium, but Trent’s successful execution of Westside bolsters our confidence that it can replicate the same with Zudio. Key risks remain: i) sub-optimal economics for Zudio’s new stores; and ii) competition from e-commerce channel. Maintain ‘BUY’

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