Trent Limited A premium play Viewpoint

Trent Limited (Trent) is a leading branded retail company with pan-India Sector: Consumer Discreationary presence. Westside is the main stay of Trent’s retail business offering New Idea exclusive range of its own branded fashion through 150 stores (2.7 million sq. ft.) in 76 cities in India. Private brands contribute almost 100% to Westside’s total revenue, which is one of the key differentiating factors compared to Change other branded retail companies such as Shoppers Stop (private brands View: Positive contribute ~12%) and Future Lifestyle Fashion’s retail brand Central (private brands contribute ~38%). Revenue for Westside stands at Rs. 10,225/sq.ft, CMP: Rs. 542 which is the highest as compared to Central, which is at Rs. 7,183/sq.ft and Shoppers Stop, which is at Rs. 2,807/sq.ft. Westside’s same-store-sales Upside potential: 18-20% growth (SSSG) has been consistent at 9% for the past five years. Higher contribution from private brands and better store fundamentals aided Trent to report consistent improvement in OPM, which stood at 9.5% in FY2019, á Upgrade  No change â Downgrade improving from 4.1% in FY2015. The company has recently ventured into the value fashion segment by introducing Zudio (40 stores opened in 25 cities) with exclusive fashion developed in-house and made available at Company details very sharp price points. Some of Zudio stores are achieving revenue of Rs. 14,000 /sq.ft, highest amongst the industry. The company’s hypermarket venture (Star Bazaar) is in a restructuring mode and focuses on fresh Market cap: Rs. 19,267 cr offering through an assortment of products. 52-week high/low: Rs. 568/313 Strong financial background, stable balance sheet Consistent retail expansion, strong traction of exclusive brands and lesser NSE volume: (No of 2.1 lakh shrinkages aided Trent to achieve strong revenue and earnings CAGR of shares) 17% and 31%, respectively, over FY2015-FY2019 (operating profit reported a CAGR of 44% over the same period). The company has stable working capital BSE code: 500251 management with operating cash cycle standing at 34 days. Despite a large part of cash flows blocked in working capital and aggressive store addition, Trent’s current debt/equity ratio is stable at 1x (considered after taking into NSE code: TRENT account the impact of Ind AS 116). The company had plans to raise Rs. 1,550 crore through equity issuance, of which, Rs. 950 crore was raised through Sharekhan code: TRENT preferential allotment to promoters. This will be utilised for further expansion plans of adding 100 stores per annum, including Westside and Zudio. The Free float: (No of company’s return profile is little weak as the company is currently into 22.4 cr shares) investment mode and some of its ventures such as Zudio is yet to break even. However, scale-up in operations of Zudio and break even of new stores of Westside will help return ratios improve in the coming years. Shareholding (%) Our Call Promoters 37.0 Initiate with Positive view and upside of 18-20%: Despite weak discretionary environment Trent has posted stellar performance with revenues growing by FII 21.6 31.4% and PAT growing by 35.0% in H1FY2020 (SSSG stood at strong 13%). With a sustainable business model, consistent store expansion and focus on improving supply chain/store fundamentals, Trent is well-poised to achieve DII 15.9 revenue and earnings CAGR of 23% and 34%, respectively, over FY2019-22. The stock is currently trading at 25x its FY2021E and 21.7x its FY2022E EV/ Others 25.5 EBIDTA (post Ind AS 116 adjustments), which is at a premium to other branded retail companies. However, consistent SSSG, strong financial track record and 100% contribution from private labels justify the premium valuation over its Price chart peers. We believe Trent is one of the best retail models one should have in

600 their portfolio. Further investment in global brand such as Zara will enhance

550 its value in the long run. In view of this, we initiate viewpoint on the stock with

500 a Positive view and potential upside of 18-20% from current levels. 450 Key Risks 400

350 Any slowdown in the discretionary demand environment would affect SSSG

300 and would, thus, act as a threat to revenue growth.

250 18 19 19 19 - - - - Valuation (Standalone) Rs cr Jul Nov Nov Mar Particulars FY18 FY19 FY20E* FY21E* FY22E* Revenue 2,066 2,532 3,217 3,928 4,675 Price performance OPM (%) 9.9 9.5 18.0 18.1 18.3 Adjusted PAT 117 128 164 218 305 (%) 1m 3m 6m 12m Adjusted diluted EPS (Rs.) 3.3 3.6 4.6 6.1 8.6 Absolute 9.7 21.0 43.5 65.9 P/E (x) 154.3 140.8 117.3 88.3 63.1 P/B (x) 11.1 10.6 7.7 7.2 6.6 Relative to EV/EBIDTA (x) 71.6 68.2 29.1 25.0 21.7 2.0 10.4 35.6 41.8 Sensex RoNW (%) 7.4 7.7 7.8 8.4 11.0 RoCE (%) 10.2 11.0 13.4 11.3 13.6 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates *estimates include the impact of Ind AS 116

November 07, 2019 21 Viewpoint

Investment Argument Westside – A successful retail model

Westside is a successful retail model in India with owned brands contributing about 99% to overall sales, while the branded apparel and retail companies such as Future Lifestyle Fashions (FLF) and Shoppers Stop derive 38% and 12% of their respective sales from own brands. This model allows the company to have an active control across the value chain with respect to key aspects such as design, branding, sourcing, pricing, display and selling. Focus on creating value through own brands aided Westside to consistently deliver SSSG of 8-9% and gross margin of 58%, which is higher compared to FLF and Shoppers Stop that posted gross margin of 36% and 42%, respectively. Westside has presence of more than 150 stores across 70 cities in India. The company is planning to add about 25 stores per year in various cities (across regions in Tier I, II and III towns). The company is focusing on delivering latest fashion trends at sharp prices, focusing on latest fashion each week through a ‘fast fashion’ anchored supply chain, active management of store portfolio through multiple initiatives and progressing omni-channel proposition through integration between store and the online platform.

Westside touched 150 stores in FY2019 SSSG maintained over the years

160 150 30 25 140 125 20 25 20 18 17 17 120 107 93 20 14 100 80 85 15 70 11 80 67 15 9 9 9 54 8

(%) 10 60 43 36 10 28 40 5 5 20 3 8 7 11 13 7 10 8 10 17 20 27 0 0 0 FY15 FY16 FY17 FY18 FY19 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Revenue growth SSSG (%) - Westside Store addition No. of stores Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Sales per square feet is on an increasing trend Consistent performance by Westside

12 11.0 11.0 62 10,500 10,225 10.0 9,980 9.0 9.0 9.0 9.0 60 10,000 9 9,581 7.0 7.0 58 6.0 9,500 9,132 6 56 Rs. (%) 9,000 8,791 54 3 8,500 52 53.7 56.1 56.9 60.0 57.9 0 50 8,000 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19

Sales per square feet (Annualised) Gross Margin (%) EBITDA Margin (%) EBIT Margin (%) Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Exciting shopping experience with great window presentation, customer communication (in-store activities and social media), availability of great offers and upgrade of existing stores to the latest visual schemes resulted in a strong increase in footfalls to ~45 million in FY2019 (CAGR of 16.3% over FY2015-19). Aided by multiple initiatives undertaken at the store level, the average bill size reported a CAGR of 8.2% to Rs. 2,332 over FY2015-19. Further, the brand actively refreshes its offerings on an ongoing basis to synchronise with latest fashion trends. This led to reduction in shrinkages as a percentage to sales to 0.18% in FY2019 from 0.24% in FY2015. Sustenance of strong SSSG, a steady increase in revenue per square feet, reduction in shrinkages and operating efficiencies resulted in higher gross margin at 58% and operating margin at 11% for Westside.

November 07, 2019 22 Viewpoint

Westside is ahead of its peers in all of the parameters Particulars Westside Central Shoppers Stop Pantaloons Number of stores 150 47 84 314 Average store size (sq. ft.) 18000 84681 47000 12949 Total area (mn. sq. ft.) 2.7 4.0 3.9 4.1 Averages sales per square feet 10225 7183 2807 7855 SSSG 9% 6% 4% 4% Private brand contribution 99% 38% 12% 28% Source: Company; Sharekhan Research

Zudio – A value fashion business Zudio is a fast churning value fashion retail concept, which sells a portfolio of 100% own brands at attractive price points and contributes ~8% to overall revenue. Zudio’s infrastructure and back-end processes are closely aligned with Westside. The company acquired Zudio from Trent Hypermarket Private Limited (THPL) in FY2018 and expanded to 40 stores across 25 cities within a year. It has adopted an accelerated expansion strategy and aims to add 30-40 stores every year. Zudio will benefit from differentiated fashion; higher volumes and active control of its value chain. Some of the independent Zudio stores are generating revenue of Rs. 14,000 per square foot, which is higher than the industry average of Rs. 8,000-10,000 per square foot. It is gaining good traction without significant advertisement and promotional spends.

Private labels and strong supply chain led to consistent improvement in OPM Trent has a sustainable business model with three core priorities: 1) product proposition; 2) supply chain innovation and 3) customer focus. The company’s key aim is to offer latest trends without compromising on the quality of the product at attractive price points. Since the company deals in almost 100% private brands, it gives the company a strong foothold in controlling its supply chain. It has fine-tuned its supply chain to deliver fast fashion, giving runway styles to customers in just 12 days. The company is aimed at providing customer satisfaction through innovation and bringing new designs to store shelves at lightening speeds, in-line with the latest fashion trends. It closely engages with suppliers for optimisation of sourcing geographies, better fabric choices as well as deploys technology to monitor production and quality milestones. Efficient supply chain management and operating efficiency at stores and distribution centres have resulted in shrinkages to decline to 0.18% of sales. These strategic initiatives have resulted in sustained SSSG over the years; and going ahead, it will help the company improve its profitability.

Consistent improvement in GPM and OPM Focus on reducing shrinkages

0.4 60 52.9 11 50.4 52.3 50.5 48.5 10 50 9.9 9 0.3 9.5 0.24 40 8 0.22 7 0.18 30 0.2 0.16 (%) 7.3 6 (%) 0.12 6.4 (%) 20 5 4 0.1 10 4.1 3 0 2 0.0 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19

GPM (%) OPM (%) Shrinkages (% of sales) Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Trent has maintained its store expansion pace Trent has been aggressive in its store expansion strategy through the years. The company operated a total of 128 stores in FY2015, including 85 Westside stores. The store count increased to 264 stores in FY2019 across all formats, including 150 Westside stores and 40 Zudio stores spread over 70 cities in India, led by differentiated product offerings and store experience. Westside has a more prominent presence in states such as with 28 stores, Gujarat with 15 stores, Karnataka and Delhi NCR with 14 stores each.

November 07, 2019 23 Viewpoint

Number of stores and cities across all formats as on FY2019 Cities operating the highest number of Westside stores Retail Format Stores Cities Westside 150 76 Maharashtra 28 Zudio 40 25 Gujarat 15

Star 44 7 Karnataka 14 Landmark 5 4 Delhi NCR 14 Zara 22 10 Massimo Dutti 3 2 Tamil Nadu 11 Source: Company Telangana 8

West Bengal 7

Uttar Pradesh 7

0 5 10 15 20 25 30

Source: Company, Sharekhan Research

Women’s western wear segment growing the fastest; Share of organised players in ethnic wear segment to increase The domestic apparel industry in India has grown from Rs. 1,924 billion in FY2010 to Rs. 5,408 billion in FY2018 at a healthy CAGR of 13.8%. Growth can mainly be attributed to urbanisation, rising disposable income and consumption, increasing retail penetration, internet penetration and a shift towards the organised retail post the introduction of the goods and service tax (GST). The domestic apparel industry is divided into men’s wear, women’s wear and kid’s wear. Men’s wear is the largest contributor to the space with 41% contribution followed by women’s wear at 38% and kid’s wear at 21%. However, with the increasing working women vertical and emergence of several branded players, the women’s wear segment is expected to outpace the men’s wear segment by 2025.

Ethnic wear comprises a majority share in the women’s apparel market majorly, driven by rural regions dominated by unorganised players. However, going ahead, organised ethnic wear penetration is expected to reach ~33%. Western women’s wear is growing the fastest at a CAGR of 17% owing to rapid urbanisation, rising number or working women and increasing influence of digital and social media with consumers becoming more aware, fashion conscious and, thus, demanding more variety and designs. Growth in the e-commerce space is another important factor fuelling the growth of women’s wear segment. The kid’s wear segment is expected to grow at a much faster rate than the men’s and women’s wear segment attributed by changing lifestyle, rising affluence of parents and entry of branded players in the kid’s wear space. Trent has a strong portfolio of own brands in the women’s western wear, ethnic wear and kid’s wear space. It offers mass to premium apparel and accessories at various price points.

Domestic apparel industry growing at 13.8% CAGR Share of women’s wear and kids wear

6000 5408 Kids wear, 4863 21% 5000 4506 3803 4003 4000 Mens wear, 2926 41% 3000 2504 2256 1924 2000

1000

0 Womens FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 wear, 38% Indian domestic apparel industry Source: Industry, Sharekhan Research Source: Industry, Sharekhan Research

November 07, 2019 24 Viewpoint

Strong performance in H1FY2020 driven by 13% SSSG

Revenue grew by ~33% y-o-y in Q2FY2020 to Rs. 818 crore from Rs. 616 crore in Q2FY2019 driven low- double-digit SSSG, whereas revenue growth for H1FY2020 stood at 31.4% y-o-y driven by 13% SSSG. Higher input costs and a change in mix led GPM to decline by 294 BPS for the quarter to 47.8% and 222 BPS for H1 to 50.3%. However, operating efficiencies coupled with the impact of Ind AS 116 drove up OPM significantly to 16.2% in Q2 and 18.7% in H1. Operating profit stood at Rs. 132.8 crore for the quarter and Rs. 296.7 crore for H1. Other income registered a considerable rise to Rs. 43.3 crore in Q2 and Rs. 79.2 crore in H1. Despite higher finance costs and depreciation due to Ind AS 116, adjusted PAT grew by 16.4% y-o-y in Q2 to Rs. 38.3 crore and registered 35% growth in H1 to Rs. 96.2 crore. The net impact on Ind AS 116 on Q2 and H1 stood at Rs. 4.26 crore and Rs. 12.81 crore respectively.

Result Snapshot (Standalone) Rs cr Particulars Q2FY20 Q2FY19 Y-o-Y (%) Q1FY20 Q-o-Q (%) Net revenue 818.0 615.9 32.8 767.2 6.6 Cost of goods sold 426.7 303.2 40.8 360.7 18.3 Gross profit 391.3 312.7 25.1 406.5 -3.8 Staff cost 82.6 61.4 34.6 74.2 11.4 Rent expenses 54.4 76.7 -29.1 50.5 7.6 Other expenses 121.4 115.4 5.2 117.9 3.0 Operating profit 132.8 59.2 - 163.9 -19.0 Other income 43.3 12.4 - 35.9 20.5 Interest 59.8 10.2 - 59.7 0.1 Depreciation 58.5 10.8 - 53.6 9.2 Profit before tax 57.8 50.5 14.4 86.5 -33.2 Tax 19.5 17.6 10.7 28.6 -31.7 Reported PAT 38.3 32.9 16.4 57.9 -33.9 EPS (Rs.) 1.1 1.0 8.8 1.7 -38.2 BPS BPS GPM (%) 47.8 50.8 -294 53.0 -516 OPM (%) 16.2 9.6 663 21.4 -513 Source: Company; Sharekhan Research

Result Snapshot (Consolidated) Rs cr Particulars Q2FY20 Q2FY19 Y-o-Y (%) Q1FY20 Q-o-Q (%) Net revenue 854.9 640.8 33.4 799.9 6.9 Operating profit 129.3 57.9 - 163.3 -20.8 Reported PAT 17.3 21.1 -18.3 36.3 -52.4 GPM (%) 46.4 49.5 -313 51.6 -522 OPM (%) 15.1 9.0 609 20.4 -529 Source: Company; Sharekhan Research

November 07, 2019 25 Viewpoint

Financials in charts

Standalone revenue and PAT grew @ CAGR of 19.3% and 13.9% Standalone OPM expanded by 535 BPS over FY2015-2019

250 9.9 9.5 10 2,700

2,400 2,532 200 7.3 8 2,100 6.4 1,800 2,066 150 6 1,500 1,717 4.1

1,492 (%) 1,200 100 4 Rs. in crore in Rs.

900 crore in Rs. 600 50 2 300 87 90 117 128 0 0 0 FY15 FY16 FY17 FY18 FY19 FY16 FY17 FY18 FY19 Revenue Adjusted Profit Operating Profit OPM (%)

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Walk-ins almost doubled over FY2015-2019 Average bill size grew at a CAGR of 8.2% over FY15-19

2,500 50 45.0 2332 2197 2029 40 36.1 2,000 1860 1700 30 24.6 25.2 26.1 1,500

20

in millions 1,000 10

500 0 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19 No. of walk-ins Average bill-size (Rs.) Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Working capital days remained stable Return ratios improved over FY2015-2019

12 11.0 40 10.2 34 10 35 8.0 7.5 29 8 30 27 5.7 27 7.7 6 7.4

25 23 (%) 5.9 Days 5.8 4

20 2 3.5

15 0 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19

Working Capital Days RoE (%) RoCE (%)

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

November 07, 2019 26 Viewpoint

Outlook Trent has reported a strong performance in the past few years with revenue and earnings growing at a CAGR of 17% and 31%, respectively driven by consistent SSSG, store expansion and strong traction of private brands. The performance in H1FY2020 was robust with 31% revenue growth backed by 13% SSSG and 35% growth in adjusted PAT. With the ongoing festive season and new store addition, we expect Trent to deliver better operating performance in H2FY2020 (SSSG to sustain at about 7-9%). The company’s effective tax rate stands at 33% currently as it is still evaluating the proposal of new rate of 25.2%. However, if the company opts for the lower tax rate, it will add to the earnings going ahead. Valuation Despite weak discretionary environment Trent has posted stellar performance with revenues growing by 31.4% and PAT growing by 35.0% in H1FY2020 (SSSG stood at strong 13%). With a sustainable business model, consistent store expansion and focus on improving supply chain/store fundamentals, Trent is well- poised to achieve revenue and earnings CAGR of 23% and 34%, respectively, over FY2019-22. The stock is currently trading at 25x its FY2021E and 21.7x its FY2022E EV/EBIDTA (post Ind AS 116 adjustments), which is at a premium to other branded retail companies. However, consistent SSSG, strong financial track record and 100% contribution from private labels justify the premium valuation over its peers. We believe Trent is one of the best retail models one should have in their portfolio. Further investment in global brand such as Zara will enhance its value in the long run. In view of this, we initiate viewpoint on the stock with a Positive view and potential upside of 18-20% from current levels.

One year forward EV/EBITDA (x) chart

700 650 35x 600 550 30x 500 450 25x 400 20x 350 300 250 200 150 100 50 0 17 18 14 15 16 15 16 17 19 19 14 15 16 18 19 14 18 ------Jul Jan Jun Oct Oct Apr Sep Feb Dec Dec Aug Aug Nov Mar Mar May May

Source: Sharekhan Research

Peer Comparison (Standalone) P/E (x) EV/EBIDTA (x) RoCE (%) Companies FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E Shoppers Stop 34.2 69.3 90.8 11.7 6.0 5.5 10.5 9.6 7.6 Future Lifestyle Fashions 39.6 35.5 24.2 15.5 7.9 6.6 9.5 12.1 12.9 Trent 140.8 117.3 88.3 68.2 29.1 25.0 11.0 13.4 11.3 Source: Company, Sharekhan estimates

November 07, 2019 27 Viewpoint

About company Trent is a leading branded retail company that operates Westside, a chain of departmental stores retailing apparel, footwear and other accessories, with over 99% contribution from own brands. Westside has presence of over 150 stores across 76 cities in India. It also operates value fashion chain Zudio, having 40 stores and books and music retail chain Landmark with five stores. Trent has a 50:50 JV with Tesco PLC UK to operate Star stores through Trent Hypermarket Private Limited. In addition, Trent has also two separate associations of 49% each with the Inditex Group of Spain to operate Zara and Massimo Dutti stores in India through Inditex Trent Retail India Private Limited.

`Trent’s owned and invested formats Westside 100% owned by Trent (part of standalone entity) Zudio 100% owned by Trent (part of standalone entity) Star 50:50 JV with Tesco PLC UK Zara 49% association with Inditex group Massimo Dutti 49% association with Inditex group Source: Company Website

Investment theme Trent is the only branded retail player with close to 100% share of private brands with pan-India presence. Trent offers a strong set of brands catering to all categories of consumers, which has helped the company report the highest average revenue per square foot compared to other branded players. Trent has maintained its SSSG momentum over the years as well as the profitability is seen increasing y-o-y. Aggressive store expansion, better store fundamentals, higher contribution from private brands and innovative product offering in the premium and value fashion space would be key growth drivers for the company going ahead.

Key Risks ŠŠ Any slowdown in the discretionary demand environment would impact SSSG, affecting revenue growth. ŠŠ Heightened competition, especially in the form of private labels by other branded players, would act as a threat to revenue growth. ŠŠ Any significant increase in key raw-material prices such as cotton would affect the company’s profitability.

Additional Data

Key management personnel Chairman Philip N Auld Managing Director P Venkatesalu Executive Director & CFO Mehernosh Surti Company Secretary Source: Company Website

Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Pvt Ltd 32.5 2 ARISAIG INDIA FUND LIMITED 7.6 3 Dodona Holdings Ltd 4.7 4 Ltd 4.3 5 HDFC Asset Management Co Ltd 4.2 6 PRAZIM TRADING & INV CO 2.6 7 Derive Trading Pvt Ltd 2.6 8 Amansa Holdings Pvt Ltd 2.5 9 Sundaram Asset Management Co Ltd 2.1 10 Franklin Resources Inc 1.9 Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

November 07, 2019 28 Know more about our products and services

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