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On a high growth path

Westside and Zudio continue to eye aggressive growth

Our channel checks threw up positive feedback on store economics, store additions, and a revenue recovery in both Westside and Zudio, despite the impact of the COVID-19 pandemic.

Both formats have a high fashion quotient. This, along with Zudio’s sharp pricing, has allowed it to taste success across multiple cities, even as other retailers have been impacted by the pandemic.

We have revised our FY24E revenue/EBITDA up by 5.8%/6.5% and are now building in 37%/57% revenue/EBITDA CAGR over FY22-24E on the back of a recovery from the COVID-19 pandemic, 33.5% footprint growth, and 9% SSSG on a stable state basis.

We upgrade the stock to Buy, with a revised TP of INR1,430 per share.

Continues to grow at an accelerate pace

TRENT’s growth in the last couple of years has been stupendous to say the least, growing at 15% over FY20-22E despite the impact of the COVID-19 pandemic. Its footprint addition has been strong (27% over FY20-22E) and much ahead of the industry. Even existing stores have done very well, with 9% SSSG (over the preCOVID period). Based on our channel checks on store additions and performance of existing stores, We have revised our FY24E revenue/EBITDA up by 5.8%/6.5% and are now building in 37%/57% revenue/EBITDA CAGR on the back of a recovery from the COVID-19 pandemic, 33.5% footprint growth, and 9% SSSG on a stable state basis. Interestingly, all this growth has been largely funded internally

Channel check offers confidence

We received good feedback on Westside and Zudio from multiple cities and towns. Westside and Zudio have seen a better recovery and achieved budgeted sales, with a healthy growth in the last couple of months v/s pre-COVID levels. This could be attributed to: a) its sticky customer base and targeting of customers through its membership program, b) higher fashion quotient in store inventory, which balances increasing prices, and c) a relatively less impacted affluent and youth customer compared to the lower middle-income group, which seemed to have curbed spending in many smaller cities as per our channel checks.

Zudio – The winner in Value Retail

Revenue from Zudio has more than doubled to INR11b in FY22E from INR4.8b in FY20, despite the impact from the COVID-19 pandemic. The same should grow 3x over the next two years to INR33b. Our estimates are based on our channel checks across multiple cities, which suggest that six-month old Zudio stores are garnering an annualized revenue run-rate of INR100m, i.e. INR14-15k/sq. ft., nearly 20-30% more than stores of a similar size. This is due to its vibrant product designs and sharp pricing with an ASP of INR300 and all products in the store priced below INR1,000. The store opening pipeline looks strong across cities, with an estimated annual store openings of 200, much above our estimate of 85 annual store openings.

Valuation and view

TRENT’s successful store performance, healthy store economics, and aggressive growth offer a huge runway for growth over the next three-to-five years. We expect 37% revenue growth over FY22-25, 4% above our Retail coverage universe, which warrants a premium valuation. We have ascribed a 31x FY24 EV/EBITDA to the standalone business (Westside and Zudio, 15% premium for the last five years until the COVID-19 outbreak and 10% premium to our Retail coverage universe), 1x EV/sales to Star Bazaar, and 15x EV/EBITDA to Zara to arrive at our TP of INR1,430/share (from INR1,180/share earlier). We have upgraded the stock to Buy. The key downside risk to our thesis is a potential GST rate hike on apparels to 12% from 5%, which can adversely impact demand, especially in the price sensitive Value Retail segment. Increasing raw material prices can compel apparel retailers to undertake another round of price hikes, which can adversely impact sales volumes.

Zudio – Trendy products with a sharp pricing

The store and products give a very trendy look and feel, targeting young value seeking consumers. The store has no false ceiling, but the interior and product color/design combinations are fashionable and appealing. It only offers Casual Wear. Despite operating on the outskirts of cities, it sells a high proportion of stylish Western wear. Its products are attractively priced, with an average price of INR300- 400, ~65% of products priced below INR499, and no product priced over INR999. This is partly achieved by offering low-cost polyester blended fabric with cotton/viscose. Its product quality is below Westside. The low pricing is also achieved by passing on the benefits of lower gross margin (~30% v/s 55% of Westside) and no marketing cost (in line with Westside) to customers.

Valuation and view

TRENT’s successful store performance, healthy store economics, and aggressive growth offer a huge runway for growth over the next three-to-five years. We expect 37% revenue growth over FY22-25, 4% above our Retail coverage universe, which warrants a premium valuation. We have ascribed a 31x FY24 EV/EBITDA to the standalone business (Westside and Zudio, 15% premium for the last five years until the COVID-19 outbreak and 10% premium to our Retail coverage universe), 1x EV/sales to Star Bazaar, and 15x EV/EBITDA to Zara to arrive at our TP of INR1,430/share (from INR1,180/share earlier). We have upgraded the stock to Buy. The key downside risk to our thesis is a potential GST rate hike on apparels to 12% from 5%, which can adversely impact demand, especially in the price sensitive Value Retail segment. Increasing raw material prices can compel apparel retailers to undertake another round of price hikes, which can adversely impact sales volumes.

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