Trent Ltd - Research Report

Private Client Research

Rating

Buy

Sector

Retailing

Company

Trent Ltd

Retailing


August 03, 2017

Sensex: 32237.88


CNX Nifty: 10013.65

NSE: TRENT


BSE: 500251

Reco Price
Rs. 278.00
Price Target (1 Year)
Rs. 335.00
Upside
20.50%

Date

August 03, 2017

Sensex

32237.88

CNX Nifty

10013.65

Exchange

Code

NSE

TRENT

BSE

500251

Stock Data

CMP (Rs)
277.95
Face value (Rs)
1
52 Week Range (Rs)
300.00 - 175.00
Market cap (Rs Crores)
9251.70
Price To Book Value (x)
5.60
P/E Ratio (x)
72.51
EV/EBIDTA (x)
44.52

One Year indexed Stock Performance

Trent Ltd Sensex
Trent Ltd
Return (%)
1m
3m
12m
36m
Absolute
15.81
10.69
50.19
129.54
Sensex
3.25
14.15
16.39
25.33

Shareholders

(in %)
31-Jul
Promoter
32.61
Public
67.39
Others
0.00
Total
100

+91 22 6639 3000

research@stockaxis.com

Renewed focus on strategic expansion

Store addition to aid future growth:
Trent is on a store expansion drive across its different major business segments. The company is looking to enhance coverage across cities with new small format stores. The number of stores under Westside is expected to be expanded to 144 stores by FY19, which is expected to contribute the most to revenue growth.The management plans to increase its presence in Tier II, III cities through the franchise route, which currently comprises ~10% of overall stores. Moreover, Zara, which focuses on high value fashion, is expected to generate higher LTL (>15%).Zara’s net store addition is expected at five stores each year.Additionally, given the shift of focus from large box Star Bazaar format to medium-small box format stores like Star Daily and Star market, total stores under the Star banner are expected to quadruple to 105 stores by FY19 versus the current 26 stores. Subsequently, total stores of the company are expected to nearly double (26% CAGR) to 286 stores by FY19 compared to current 176 stores.

Westside – Leading growth:
Westside plans to accelerate store expansion (currently at 95 stores across 58 cities in India) in the coming years by focusing broadly on two formats: flagship stores - the prominent full offer stores and the curated smaller stores in non-metros/emerging micro-markets. The major focus would be on opportunities in Tier II and Tier II markets. There will be 15-20 stores addition every year in West side for the next 3 years.

Star Bazaar: new compact sized store additions to aid growth: The company has changed its strategy in the Indian food & grocery market by focusing on super market model and has reinvented its business model from large format supermarket stores to smaller convenience stores mainly located on high streets to improve profitability as the model entails smaller formats generating higher revenue per sq ft. The new strategy involves aggressive scaling up of small format stores (SFOs) under the banner Star Daily & Star Market with higher focus on smaller cities. The lower rentals and operating expenses in the smaller cities would aid in profitability going forward.

Zara - Jewel in crown:
Zara has been the most consistent retail segment within Trent. Since its inception, its revenue has grown at a CAGR of ~45% in FY11-16, which makes it one of the fastest growing retail companies in India. There are plans to add 5 Zara stores each over FY16-19E. There would also be ~10% LTL growth which would aid in growth going forward.

Restructuring of Landmark to boost standalone margins, going forward:
Landmark, which was primarily a music & books retail format, had been undergoing constant restructuring due to increased threats from the internet, which resulted in a decline in book sales. The music segment was especially impacted by free digital downloads, which further gained momentum through growth of smart phones. As part of the restructuring drive, the company plans to reduce the number of stores and reinvent itself to a family home entertainment store with a rejuvenated product mix. Landmark has also been merged with the standalone entity aiding in improvement of standalone margins.

Organised retail share lowest in India; set to grow at 21% CAGR in FY15-20E:
The Indian retail space is highly fragmented with an estimated 12-15 million outlets, primarily dominated by the unorganised sector. Family run mom & pop stores contribute ~92% of the overall market. The overall size of Indian retail is estimated at ~US$622 billion as on FY14-15. It is expected to register 11.6% CAGR in 2015-20. Globally, compared to other emerging Asian countries like Indonesia, Thailand, Malaysia, Taiwan, China, etc, organised retail in India is highly under-penetrated. In keeping with trends from global markets, the Indian organised retail sector is expected to grow at 21% CAGR in FY15-20E.

Return ratio expected to ramp up on improving financials:
An improved operational performance would lead to higher free cash flows, assisting expansion plans through internal accruals. Additionally, adopting the asset-light model for expansion through the franchise route would further aid the expansion in return ratios. Higher emphasis on small box format stores would yield superior revenue per square feet for Trent.

 

Industry

There has been a rapid transformation in the buying pattern of Indian consumers which has been mainly driven by the increasing aspiration for branded products among the youth. Strong penetration and the influence of visual media have led to a change in clothing trends in rural areas that have begun catching up with urban consumers. The share of the organised apparel market is expected to reach $45 billion (38% of the overall market of $116 billion) by FY25E vs. the current share of 20% of the overall apparel market of $50 billion.

Company Description

Trent is a leading organised retail player in India operating various chains of stores like Westside, Star Bazaar (JV), Landmark and Zara (JV). Trent, incorporated in 1998, operated 176 stores as on FY17.

Westside:
Westside is the biggest contributor to Trent’s overall business (90% of total standalone revenues). It offers apparel, footwear, cosmetics, perfumes, home furnishing and accessories. Westside’s sourcing/store model spans right from design to shelf, with intermediary activities like branding, sourcing, logistics, distribution, pricing, display and promotion. Almost 90% of its total revenues come from higher margin private label brands, the highest in the industry. This business model has a proven track record with healthy like-to-like (LTL) sales growth of >6% over the past five years. As on FY17, Westside operates 107 stores across 58 cities in India.

Landmark Landmark is in the business of retailing books, music, stationery, games, toys, etc. The chain earlier focused on books and music. It was acquired by Trent in 2005. Trent added a range of products to Landmark’s offering, including toys, stationery, sports merchandise, etc. Over a period of time, this segment has undergone a significant restructuring process, including rationalisation of the stores’ portfolio. In a restructuring initiative, the store count was reduced from 26 in FY11 to 5 stores in FY16.

Fiora Hypermarket (FHL):
FHL is a subsidiary company of Westside, comprising two stores of Star Bazaar in Gujarat and Tamil Nadu. It was separated from Trent Hypermarket (THL) to adhere to the approved FDI guidelines in India. FHL also pursues a grocery online portal www.my247market.com, on a limited trial basis, to explore the online grocery retailing opportunity in the proximity of select Star banner stores.

Star Bazaar:
Star Bazaar is a hypermarket concept focusing on categories like groceries, foods, home care, apparel, home décor, health and beauty products. Trent Hypermarket (THL) operates in a 50:50 JV between Trent Ltd & Tesco Plc UK. Star Bazaar has charted out a new version of compact supermarket and neighbourhood Star Banner stores of various sizes like Star Market and Star Daily. As on FY16, Trent Hypermarket operated 26 Star banner stores in India, concentrated in states of Mumbai, Pune and Bangalore.

Zara
Zara is a leading global Spanish fashion apparel brand, focusing on customers at the premium end. Trent operates Zara stores in a joint venture (JV) with the Inditex group of Spain with a shareholding of: Inditex - 51% and Trent - 49%. As on FY16, the JV operated 18 stores across top cities in India. Trent also has a JV with Inditex for the brand Massimo Dutti, a sister brand of Zara. For FY16, Massimo Dutti commenced operations with its maiden store in Delhi.

Profit & Loss Statement:- (Consolidated)

(Rs Crores)

Particulars Mar-16 Mar-17 Mar-18E Mar-19E
Net Sales 1,589.3 1,833.9 2,329.1 2,701.7
Total revenue 1,589.3 1,833.9 2,329.1 2,701.7
Growth (%) - 15.4% 27.0% 16.0%
Total Expenditure 1496.6 1708.2 2161.4 2493.7
EBITDA 92.7 125.7 167.7 208.0
EBITDA (Margin %) 5.8 6.9 7.2 7.7
Other Income 57.3 60.5 71.0 80.0
Operating Profit 150.1 186.2 238.7 288.0
Interest 37.6 33.8 38.5 34.3
PBDT 112.5 152.4 200.2 253.7
Depreciation 38.6 41.3 59.8 64.5
Profit Before Taxation & Exceptional Items 73.9 111.1 140.4 189.2
Exceptional Income / Expenses 11.3 -0.5 0.0 0.0
Tax 34.7 43.1 44.7 58.5
Profit After Tax 50.5 67.6 95.7 130.7
Minority interest -0.1 0.0 0.0 0.0
Share of profit from JV 8.1 -9.0 22.0 40.5
Report consol PAT 58.5 58.6 117.7 171.2
EPS 1.8 1.8 3.5 5.2
Source: Stockaxis Research, Company Data

Valuation

The expansion of high ROCE Westside stores, restructuring of Landmark stores, and rightsizing of Star Bazaar will significantly improve financial performance of the company going forward, placing Trent at an inflection point. The execution of these strategies would lead to improvement in Trent’s financials. We expect revenues/PAT to grow at 21.4%/71.0% CAGR over the next 2 years (FY17-19E). We value Trent at 4.2x FY19E consolidated EV/Sales recommend a ‘Buy’ with a target price of Rs. 335 giving an upside of ~21%.