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Robust expansion continues with better profitability

Ready to launch Star Bazaar; prioritizing Westside, Zudio and Star We attended Trent’s AGM. Here are the key takeaways:

Stellar performance

Trent continues to post strong standalone/consolidated revenue growth of 55%/ 50% YoY to INR119b/INR124b in FY24, aided by 37% YoY store addition and 10% LFL growth. Despite a slight contraction of 20bp in standalone gross margin (due to high mix of Zudio), EBITDA margin (pre-Ind-AS) improved to 11.7% (up 300bp YoY), aided by lower ad spending and operating leverage. Standalone adj. PAT improved to INR10.3b (vs. INR5.5b in FY23). In addition, the Booker subsidiary and Star (JV) losses have declined, which boosted consolidated PAT to INR10.4b (vs. INR4b in FY23). On the standalone basis, Trent generated FCF of INR4b (vs. - INR275m in FY23).

The expansion momentum to continue

Trent added gross 30/203 Westside/Zudio stores in FY24, which is in line with its guidance provided in the last year’s AGM. Westside has consolidated small stores into larger stores; hence, net store adds were 18. Total standalone store count stands at 811, including 22 Utsa stores, 10 Misbu stores and two Samoh stores. Going forward, the company aims to maintain the pace of store additions at 30/200 Westside/Zudio stores. Despite its robust expansion plan, we do not see any deterioration in Trent’s store economics. The company may maintain a slow pace of store expansion in Utsa, Misbu and Samoh until they are able to crack the perfect model, pricing and other relevant factors for their brands, which are under incubation before going into expansion phase.

Ready to launch Star Bazaar

The management highlighted yet again that Star will be its third engine of growth (delivered 27% LFL in FY24). The management targets to add 20-25 stores in FY25 by following the cluster strategy to expand and focus on its own brands, which offer 20-30% savings to consumers. In FY24, despite an improvement in gross margins (+150bp YoY), Star posted EBITDA of INR255m (vs. INR1.7b in FY23) and margins of ~1%, which could be due to the reclassification of lease liability and the cost of modification of stores. Trent has funded the losses mainly through the liquidation of certain financial assets and issue of equity. For the last two years, the company has been constantly optimizing the format. We believe Star Bazaar might need funds for its expansion for a year, but going forward it may fund its growth internally as the size of the grocery market is INR76t, which provides tailwinds for the sector.

Valuation and View

* The discretionary category continues to see muted demand, but Trent has far outpaced the industry. It delivered industry-leading LFL growth of 10% and hence gained market share over other retailers in the apparel segment (especially in value format). Further, despite aggressive store addition, it has limited balance sheet risk or weakness in operations. Trent’s industry-leading revenue growth is mainly driven by: 1) strong SSSG and productivity, 2) healthy footprint additions, and 3) Zudio’s strong value proposition.

* Trent’s successful store performance, healthy store economics, and aggressive growth strategy offer a huge runway for growth over the next three-to-five years. Star’s improving store metrics further offer a further opportunity.

* We have raised our standalone revenue/EBITDA estimates by 4%/6% for FY25/FY26, factoring in higher store addition for Zudio.

* We estimate a CAGR of 36%/34% in standalone revenue/EBITDA over FY24-26, led by 23% store addition and healthy SSSG, which justify the premium valuation for the stock. We have ascribed 54x to standalone business, 2x EV/sales to Star Bazaar, and 15x EV/EBITDA to Zara to arrive at our TP of INR5,500. Adjusting Star’s and Zara’s values, the stock is trading at 82x FY26E EPS for the standalone business. Retain BUY

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