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We attended Trent Ltd’s annual general meeting (AGM). Here are the key takeaways:

Focus on value drives profitable growth

Trent’s standalone revenue/EBITDA (pre-IND AS 116) reported a robust CAGR of 34%/37% over FY20-23E, backed by strong footprint addition and healthy LFL growth despite the Covid impact. The two key points that stand out: 1) its strategy to focus on value: In a high RM cost environment where most companies tried to pass on the impact to protect market share, Trent took a hit on gross margins but improved EBITDA margin through operating leverage; 2) Aggressive growth without diluting its store economics, which is evident from healthy ROE of 19%. As a result, Trent posted an industry-beating EPS CAGR of 42% over FY19-23E

Emphasis on expansion remains steadfast

Trent has been on an aggressive expansion spree. In FY23, it added 158 new stores, taking the total to 590 stores. The focus was mainly on Zudio, which saw 125 additions in FY23. Notably, the aggressive expansion was done without deteriorating store economics, as seen in Zudio’s improving margins. Trent is expected to continue the historically robust footprint growth, as it plans to add 30/200/10 stores for Westside/Zudio/Samoh in FY24, with an estimated capex of INR8b. With an estimated OCF of INR10b in FY24, we expect capex to be funded internally

Developing new engine of growth

The management has indicated that Star will be a key growth engine (48.2% LFL in FY23), supported by 1) the cluster strategy to grow the existing 63 hyper and super market stores; 2) value offerings led by its price leadership and portfolio of own brands, along with the fresh category that offers 20-30% savings to consumers; and 3) scaling up its omni channel (StarQuick) to make it profitable. Further, the company has indicated that its new segments Utsa and Misbu are ready for expansion. Trent also plans to scale up its recent foray into ethnic wear through Samoh by increasing its store count to 100 in a
few years
 

Valuation and View

* At 30.1x EV/EBITDA and P/E of 54.8x on FY25E basis, Trent is trading at rich valuations. However, the strong growth potential and historically robust performance justify the higher multiples.

* Star’s improving store metrics and scaling up of Samoh offer a further opportunity.

* We assign 30x EV/EBITDA to the standalone business (Westside and Zudio), 1x EV/sales to Star Bazaar, and 15x EV/EBITDA to Zara to arrive at our TP of INR1,835. We reiterate our BUY rating on the stock.

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