India Equity Research Retail July 12, 2021
TRENT
ANNUAL REPORT INSIGHTS
KEY DATA Rating BUY No pause in sight Sector relative Outperformer Price (INR) 899 12 month price target (INR) 1,056 Trent’s annual report is an important piece of information as it offers Market cap (INR bn/USD bn) 320/4.3 granularity on the company’s various business segments. Key Free float/Foreign ownership (%) 63.0/30.0 What’s Changed highlights: 1) Despite losses, Trent reported positive cash flow driven Target Price Rating/Risk Rating ⚊ by inventory liquidation and rental savings. 2) Store ramp-up across Zudio/Westside was highest in past decade riding the capital raise in INVESTMENT METRICS FY20; however, Zara’s expansion was muted. 3) Zudio’s recovery 245 outpaced Westside’s given its value format and store locations. 175 105 We believe Trent has established the viability for Zudio and expect it 35 -35 to drive the company’s next leg of growth. Hence, we increase target Sales Growth EPS Growth RoE PE (%) (%) (%) (x) EV/EBITDA multiple leading to revised TP of INR1,056. Weak store Retail TRENT IN Equity economics for Zudio and e-commerce are key risks. Maintain ‘BUY’.
FINANCIALS (INR mn) Cash flow improves despite covid; expansion pace robust Year to March FY21A FY22E FY23E FY24E Despite losses (EBITDA loss in FY21, adjusting for rent), Trent managed to report Revenue 25,930 36,490 48,108 56,642 positive operating cash flow driven by: a) inventory liquidation (INR1.8bn); and EBITDA 1,841 5,948 8,178 9,969 Adjusted profit (1,811) 1,091 2,585 3,957 b) rental savings (INR0.9bn). Pace of store expansion remained robust–highest in its Diluted EPS (INR) (5.1) 3.1 7.3 11.1 history. However, increase in capital employed was limited in FY21 as proceeds from EPS growth (%) nm nm 136.9 53.1 the preferential allotment in FY20 (INR9.5bn) were used for capex. FY21 also saw RoAE (%) (7.7) 4.6 10.1 13.7 three board level exits and departure of Mr. Venu Nair (CEO- Westside). In addition P/E (x) nm 292.9 123.7 80.8 Mr. Philip Auld – ED, earlier MD, also quit in April 2021. EV/EBITDA (x) 126.9 39.7 28.8 23.3 Dividend yield (%) 0 0 0 0 Omni approach for Westside; Zudio sees massive expansion In FY21, Westside and Zudio saw 28 and 68 store openings, respectively--highest in PRICE PERFORMANCE the past decade. In terms of performance, Zudio’s recovery was better than 950 54,000 Westside’s, given its value format and independent store locations. Westside 865 50,400 managed to keep its gross margin intact despite covid driven by lower discounting. 780 46,800 However, lower throughput impacted its EBITDA margin. FY21 saw the launch of 695 43,200 610 39,600 Westside.com (initially collection was available only on Tata Cliq); this helped it clock 525 36,000 5% online share--a first. Trent is also planning to leverage the Tata Digital platform, Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 which is slated to go live soon. For Zudio, Trent is looking at ramp-up this year; we TRENT IN Equity Sensex believe, Trent has established viability of the format. Outlook and valuations: Growth lever ramping up; maintain ‘BUY’ Explore: Trent’s success over the past decade has been driven by customers’ affinity to Westside, which has helped drive industry leading SSSG. We expect pick up in Zudio’s
pace and the large value retail opportunity to drive Trent’s next leg of growth over
the coming decade and potentially outpace Westside.
Financial model Podcast Hence, we increase our target EV/EBITDA multiple for the standalone business (Westside + Zudio) to 45x (40x earlier) and roll-over valuation to Q3FY23E, leading to revised TP of INR1,056 (INR899 earlier). Valuations are at a premium, but Trent’s success/execution with Westside’s scale-up bolsters our confidence that it can replicate the same with Zudio. Key risks remain: a) sub-optimal economics for Zudio’s Corporate access Video new stores; and b) competition from e-commerce channel. Maintain ‘BUY’
Nihal Mahesh Jham Abneesh Roy +91 (22) 6623 3352 +91 (22) 6620 3141 [email protected] [email protected]
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TRENT
Financial Statements
Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E Total operating income 25,930 36,490 48,108 56,642 Share capital 356 356 356 356 Gross profit 10,590 16,968 21,889 26,338 Reserves 22,775 23,866 26,450 30,407 Employee costs 3,019 3,941 4,811 5,834 Shareholders funds 23,130 24,221 26,806 30,763 Other expenses 538 511 818 1,020 Minority interest 445 445 445 445 EBITDA 1,841 5,948 8,178 9,969 Borrowings 2,999 0 0 0 Depreciation 2,573 3,352 3,595 3,815 Trade payables 2,746 3,209 4,310 4,981 Less: Interest expense 2,608 2,468 2,458 2,586 Other liabs & prov 26,772 28,357 29,947 31,447 Add: Other income 2,016 1,100 700 1,000 Total liabilities 56,092 56,233 61,508 67,636 Profit before tax (2,038) 1,404 3,305 5,122 Net block 31,548 34,655 36,925 38,687 Prov for tax (237) 313 720 1,165 Intangible assets 773 780 777 764 Less: Other adj 0 0 0 0 Capital WIP 233 233 233 233 Reported profit (1,801) 1,091 2,408 3,763 Total fixed assets 32,554 35,668 37,935 39,684 Less: Excp.item (net) (10) 0 0 0 Non current inv 8,166 8,166 8,166 8,166 Adjusted profit (1,811) 1,091 2,408 3,763 Cash/cash equivalent 7,521 2,183 2,778 5,658 Diluted shares o/s 355 355 355 355 Sundry debtors 208 352 464 547 Adjusted diluted EPS (5.1) 3.1 6.8 10.6 Loans & advances 1,562 1,636 1,718 1,809 DPS (INR) 0 0 0 0 Other assets 5,489 7,623 9,825 11,168 Tax rate (%) 11.6 22.3 21.8 22.7 Total assets 56,092 56,233 61,508 67,636
Important Ratios (%) Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E Westside-SSSG (%) (40.0) 50.0 30.0 8.0 Reported profit (2,038) 1,228 2,825 4,568 Star Bazaar growth (%) 8.0 8.0 8.0 8.0 Add: Depreciation 2,580 3,352 3,595 3,815 Inditex growth (%) (27.9) 42.2 42.8 10.0 Interest (net of tax) 2,197 2,468 2,458 2,586 EBITDA margin (%) 7.1 16.3 17.0 17.6 Others (1) (1,100) (700) (1,000) Net profit margin (%) (7.0) 3.0 5.4 7.0 Less: Changes in WC 1,063 (1,815) (1,213) (754) Revenue growth (% YoY) (25.6) 40.7 31.8 17.7 Operating cash flow 3,738 3,996 6,725 8,604 EBITDA growth (% YoY) (66.2) 223.1 37.5 21.9 Less: Capex (911) (2,421) (1,663) (1,210) Adj. profit growth (%) nm nm 136.9 53.1 Free cash flow 2,827 1,575 5,062 7,394
Assumptions (%) Key Ratios Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E GDP (YoY %) (6.0) 7.0 6.0 6.0 RoE (%) (7.7) 4.6 10.1 13.7 Repo rate (%) 3.5 3.5 4.0 4.0 RoCE (%) 4.7 14.4 20.4 24.5 USD/INR (average) 75.0 73.0 72.0 72.0 Inventory days 123 100 105 112 COGS (%) 59.2 53.5 54.5 54.5 Receivable days 3 3 3 3 Rent (%) 4.0 5.5 5.3 5.3 Payable days 68 56 52 56 Ad spends (%) 1.4 1.4 1.7 1.7 Working cap (% sales) 39.6 18.4 17.7 21.6 Tax rate (%) 17.9 25.5 25.5 25.5 Gross debt/equity (x) 0.1 0 0 0 Debtor days 1.8 1.8 1.8 1.8 Net debt/equity (x) (0.2) (0.1) (0.1) (0.2) Inventory days 92.0 60.0 60.0 60.0 Interest coverage (x) (0.3) 1.1 1.9 2.4
Valuation Metrics Valuation Drivers Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E Diluted P/E (x) nm 292.9 123.7 80.8 EPS growth (%) nm nm 136.9 53.1 Price/BV (x) 13.8 13.2 11.9 10.4 RoE (%) (7.7) 4.6 10.1 13.7 EV/EBITDA (x) 126.9 39.7 28.8 23.3 EBITDA growth (%) (66.2) 223.1 37.5 21.9 Dividend yield (%) 0 0 0 0 Payout ratio (%) nm 0 0 0
Source: Company and Edelweiss estimates
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TRENT
Key highlights
Trent: Cash flow improves despite covid; expansion pace robust
Despite lower profitability, Trent managed to report higher operating cash flow driven by: a) liquidation of inventory (INR1.8bn); and b) rental savings (INR0.9bn).
The increase in capital employed was limited in FY21 as proceeds from the preferential allotment in FY20 (INR9.5bn) were used for capex this year.
FY21 has seen significant board level changes--highest in past many years.
Positive cash flow driven by inventory liquidation and rental saving
Despite losses, Trent managed to report positive operating cash flow driven by: a) Liquidation of inventory: Inventory had built-up in FY20 due to covid impact in the last fortnight of March. FY21 saw release of INR1.8bn. b) Rental savings: Though Trent’s reported rental outgo is similar YoY, it includes INR0.9bn of savings (recognized in other income).
Though the company’s standalone operations (Westside, Zudio and Landmark) were cash sufficient, the company reported cash losses in its subsidiaries (primarily Star business and Booker India.)
Cash flow summary
INR mn Standalone Subsidiary(Derived) Consolidated FY20 FY21 FY20 FY21 FY20 FY21 Profit Before Tax 2,456 -658 -806 -1,380 1,650 -2,038 Depreciation 2,311 2,359 168 222 2,480 2,580 Interest 2,058 2,084 68 113 2,126 2,197 Non-Operating Income -147 -48 121 47 -26 -1 Non-Cash Adjustments -1,074 -734 264 683 -810 -51 Direct tax -807 -1 -28 -10 -835 -11 Cash Profit after Taxes 4,798 3,002 -212 -326 4,586 2,676
(Increase)/Decrease in Receivables -219 -403 20 14 -199 -389 (Increase)/Decrease in Inventories -971 1,920 82 -125 -890 1,794 Increase in loans & advances and other assets -125 -145 -24 -90 -149 -235 (Increase)/Decrease in trade payables 203 -241 61 132 263 -108 Changes in Working Capital -1,112 1,131 138 -69 -974 1,063 Net Cash from Operating Activities 3,685 4,133 -74 -394 3,612 3,738
Lease Payments + Interest -3,232 -3,156 -122 -205 -3,354 -3,361 Capex -1,465 -1,031 -94 -103 -1,559 -1,134 Free Cash Flows -1,012 -54 -290 -702 -1,302 -756 Source: Company, Edelweiss Research
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TRENT
Trent's cash flow conversion trend
3.0 100.0
2.0 80.0
1.0 60.0 (%)
(INRbn) 0.0 40.0
(1.0) 20.0
(2.0) 0.0 FY17 FY18 FY19 FY20 FY21 CFO EBITDA CFO/EBITDA (%)
Source: Company, Edelweiss Research, Note: Financials for FY20, FY21 have been adjusted for IND AS 116 to compare with earlier years
Capital employed & JVs: Not much change as preferential issue amount deployed
The increase in capital employed in FY20 was driven by the preferential allotment of INR9.5bn to Tata Sons. The increase in subsidiaries capital employed in FY20 is related to the acquisition of Booker India.
In FY21, Trent funded its capex by selling investments. We expect these investments (~INR6.7bn) to fund its capex in FY22 as well. Also, last tranche of the company’s INR3bn debt is due for repayment this year.
We estimate Westside’s store ROCE at 20-25%. Adjusting for corporate overheads (assuming 5% of revenue), company level ROCE for Westside would be around 15- 20%. Trent’s standalone business reported ROCE of 16%, which is a reflection of the performance of Westside and marginally dragged down by Zudio--a format which is yet to scale-up.
Capital employed bifurcation
INR mn FY17 FY18 FY19 FY20 FY21 Capital Employed Standalone 13,441 14,127 14,919 20,321 19,803 Subsidiaries 757 410 383 1,712 1,435 JV/Associates 5,204 5,339 6,075 5,638 5,337 Consolidated 19,402 19,876 21,378 27,671 26,575
Profitability* Standalone - EBIT + Other Income 1,552 2,148 2,397 3,973 724 Subsidiaries- EBIT + Other Income 348 -17 -89 -430 -896 Consol - EBIT + Other Income 1,900 2,131 2,307 3,543 -172
RoCE (%) Standalone - RoCE (%) 11.5 15.2 16.1 19.6 3.7 Consol - RoCE (%) 9.8 10.7 10.8 12.8 -0.6 Source: Company, Edelweiss Research
Note: Profitability for FY20/FY21 has been adjusted for IND AS 116 impact
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TRENT
Du Pont analysis
FY17 FY18 FY19 FY20 FY21 Net Profit Margin (%) 4.9 5.1 4.0 4.9 -3.0 Asset Turnover (x) 0.9 0.9 1.1 1.2 0.9 Financial Leverage (x) 1.5 1.5 1.5 1.4 1.3 RoE (%) 6.3 7.0 6.6 8.4 -3.4 Source: Company, Edelweiss Research
Note FY20/21 ratios are excluding the impact of IND AS 116
Also, in terms of investment in its JVs/associates, Trent invested INR0.5bn in Trent Hypermarket, its JV with Tesco for Star Bazaar. There was no investment in addition to this.
Investment in JV/associates
INR mn FY17 FY18 F19 FY20 FY21 Joint Venture Trent Hypermarket Pvt ltd 4,050 4,050 4,901 5,122 5,572 Associates Inditex Trent Retail India Pvt Ltd. 318 318 318 318 318 Massimo Dutti India Pvt Ltd. 110 184 184 184 184
Total (INR mn) 4,478 4,551 5,403 5,623 6,073
Share of Profits in JV/Associates -90 -226 -117 -304 -714 Source: Company, Edelweiss Research
Board, management and employees
FY21 has seen some churn at Trent with Mr. Venugopal G Nair (CEO- Westside) and Mr. Philip Auld (MD) quitting. On the board too three independent directors resigned. Mr. S Rayfield continued as the CEO of Trent.
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TRENT
Board of Directors evolution
FY17 FY18 FY19 FY20 FY21 Executive Directors NN Tata Y Y Y Y Y P Venkatesalu Y Y Y Y Y
Non-Executive Non Independent B Bhat Y Y Y Y Y Harish R Bhat Y Y Y Y Y J Merchant N N N N Y
Independent B N Vakil Y Y Y Y Y S Singh Y Y Y Y Y Susanne Given N N N N Y
Previous Directors Z S Dubash Y Y Y Y Y Abhijit Sen Y Y Y Y Y S Susman Y Y Y Y Y Philip Auld Y Y Y Y Y Sonia Singh Y N N N N Source: Company, Edelweiss Research
Note: Z S Dubash was a Director upto April 2020, Abhijit Sen was a Director up to November 2020, S Susman was a Director up to May 2021, Philip Auld was a Director up to April 2021.
In addition, the decrease in median remuneration of employees in FY21 was 13.4%. The average decrease in salaries other than the managerial personnel was 9.3%, and 37.1% for managerial personnel.
Related party transactions
The only major change seen in related party transactions in FY21 was an increase in purchases by ~INR440mn from Trent Hypermarket.
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TRENT
Related party transactions summary % of % of Related party transactions (above INR25mn) FY20 FY21 revenue revenue Sales to/and other recoveries from related parties - THPL (JV) 732 2.1 471 1.8 - Tata International 8 0.0 1 0.0 Purchase/other services from related parties - Tata Sons (Investing Party) 197 0.6 118 0.5 - THPL (JV) 629 1.8 1,071 4.1 - TCS 122 0.3 129 0.5 - Tata International West Asia 32 0.1 0 0.0 - THPL Support Services 260 0.7 212 0.8 - Tata Communication Limited 75 0.2 76 0.3 Interest/Dividend received from related parties - Tata International 42 0.1 42 0.2 - Inditex Trent Retail India Pvt. Ltd. 122 0.3 48 0.2 Total 2,141 6.1 2,091 8.1 Source: Company, Edelweiss Research
Brand wise store and revenue bifurcation: Zudio driving growth
Trent continued with its aggressive expansion in FY21, with the growth driven by Zudio. Of all its sub-brands, Zara was the only one to see a reduction in store and city count. Trent highlighted that as of the date of the annual report, a significant number of its fashion retail stores (Westside/ Zudio / Utsa/ Landmark) were either temporarily shut or were operational, albeit with certain restrictions.
Brand wise store and city count
Store count Cities Brand/Format FY19 FY20 FY21 FY19 FY20 FY21 Westside 150 165 174 76 87 90 Zudio 40 80 133 25 44 57 Star 44 57 60 7 7 7 Zara 22 22 21 10 12 11 Booker/Value Mandi 0 6 9 0 3 3 Landmark 5 4 6 4 3 4 Utsa 0 3 4 0 2 4 Massimo Dutti 3 2 3 2 2 2 Total 264 339 410 Source: Company, Edelweiss Research, Note: Excludes stores ready to launch
Outlook
Concentrate resources on substantially growing anchor concepts (especially Westside, Zudio and Star Market).
Focus on strengthening omni-channel capabilities to facilitate seamless integration between store and online operations.
Pursuing agenda of making certain expenditure vary more directly with revenue, including with respect to lease payments.
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TRENT
Westside: Making strides on becoming an omni brand
Westside managed to keep its gross margin intact, despite covid, driven by lower discounting. However, lower throughput impacted EBITDA margin, which fell to 1% (pre-Ind AS 116) in FY21 (11% in FY20).
Despite both the waves, Westside’s expansion plans remained robust; net addition of 28 stores for FY21--highest in the past decade. FY21 saw the launch of Westside.com (initially, collection was available only on Tata Cliq). This helped Westside clock 5% online share--a first. Trent also plans to leverage the Tata Digital platform, which is slated to go live soon.
Westside - Key highlights
FY17 FY18 FY19 FY20 FY21 Key Financials Revenue growth (%) 17 20 17 16 NA
SSSG (%) 9.0 9.0 9.0 7.3 NA
Gross Margin (%) 56.9 60 57.9 56.1 57.6
EBITDA (%) 10 11 11 11 1
Store based metrics Total Stores 107 125 150 165 193 Estimated Sq.ft (mn) 1.9 2.3 2.7 3.0 3.5
Other key metrics Walk-Ins (#) 26.1 36.1 45.0 50.9 NA Average bill size (INR) 2,029 2,197 2,332 2,357 2,574 The WestStyle Club members (mn) 3.5 4.5 5.1 5.9 6.6 % Contribution to Rev 80+ 80+ Shrinkage (%) 0.16 0.12 0.18 0.17 NA Source: Company, Edelweiss Research
Note: EBITDA margin is pre IND AS 116
Westside managed to keep its gross margin intact, despite Covid, driven by lower discounting, especially in Q3 and Q4FY21, when the company was running low on inventory. However, lower throughput impacted its EBITDA margin, which fell to 1% in FY21 (11% in FY20).
Average bill size increased by 9% YoY in FY21 as most shoppers limited their outings and shopped higher in every instance.
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TRENT
Quarterly LFL trajectory
0
-20
-40 (%) -60
-80
-100 Q1FY21 Q2FY21 Q3FY21 Q4FY21
Source: Company, Edelweiss Research
Store expansion
Despite both the waves, Westside’s expansion plans remained robust--net addition of 28 stores for FY21 (19 are fitted out and still to be opened)--highest in the past decade. As of end March 2021, Westside had 174 stores across 90 cities.
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TRENT
Westside stores by state
FY17 FY18 FY19 FY20 FY21 Maharashtra 18 24 28 28 31 Karnataka 10 12 14 15 23 Gujarat 10 14 15 15 18 Uttar Pradesh 11 11 7 13 14 Tamil Nadu 8 9 11 12 13 Telangana 5 6 8 10 13 Kerala 3 4 5 5 9 Delhi 7 9 14 7 8 West Bengal 4 4 7 7 7 Madhya Pradesh 4 4 5 7 7 Andhra Pradesh 4 4 4 6 7 Rajasthan 6 6 6 6 6 Punjab 5 4 6 6 6 Uttarakhand 3 3 3 4 4 Haryana 1 1 1 4 4 Assam 1 1 3 3 4 Chattisgarh 2 2 2 3 3 Jharkhand 2 2 3 Bihar 1 3 3 Odhisa 1 1 2 2 3 Goa 2 2 2 2 2 JK 1 1 1 1 1 Himachal Pradesh 1 1 1 Sikkim 1 1 1 1 1 Mizoram 1 1 Nagaland 1 1 1 1 1 Total 108 124 150 165 193 Source: Company, Edelweiss Research Note: Of the 193 store, 19 are fitted out and still to be opened
Store opening and closures
FY17 FY18 FY19 FY20 FY21* Addition 17 20 27 20 30 Closure 3 2 2 5 2 Total 107 125 150 165 193 Source: Company, Edelweiss Research
Note: Of the 193 store, 19 are fitted out and still to be opened
Online initiatives
Initially, Westside’s collection was only available on Tata Cliq (a Tata Group marketplace initiative). However, Trent launched Westside.com in November 2020. In FY21, for the first time, over 5% of Westside’s revenues were recorded through the online channel.
Trent is targeting to grow this channel significantly for Westside in the years ahead and also leverage the Tata Digital platform, which is slated to go live soon.
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TRENT
Key MD&A highlights:
As Westside’s beauty offerings continue to grow, management remains enthusiastic about building this business further as a destination category by providing customers with differentiated, high quality and attractively priced products.
Efficient utilization of retail space is one of Trent’s key initiatives. Westside continues to assess stores in terms of revenues and revisit space allocated to brands with differentiated performance. Sales per square feet is one of the key measures to assess this.
Geo-targeted digital campaigns around catchment areas of its stores and digital promotions on relevant social media channels are being leveraged to connect with target audience. Westside received the highest-ever number of views– 76mn–for its brand campaigns in FY21.
Targeted, customized and topical member campaigns supported by data driven analytics has helped Westside achieve sales contribution of over 80% from active members.
Given the competitive marketplace and an audience with significant real time exposure to global fashion trends, Westside is increasingly focusing on rapid delivery of latest fashion by sharply reducing the concept-to-customer time.
A sustainable supply chain with strong inventory discipline is the backbone of Westside’s business. Its warehouse ecosystems services the growing requirements of the business. Use of technology and strong inventory management system enable Westside to deliver fresh fashion every week along with faster replenishment on an ongoing basis, ensuring sustained efficiency.
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TRENT
Zudio: Recovery better than Westside; expansion highest in history
Zudio saw strong recovery in second half led by LFL improvement. Relative to Westside, Zudio’s accelerated recovery was also driven by its standalone locations.
Addition of 68 stores was the highest in the format’s history. Looking at the step up in aggression on Zudio, we believe Trent has established viability of the format and is now looking at its rapid scale-up.
Performance summary
Pandemic-related disruptions impacted Zudio’s revenues, especially in H1FY21. “Zudio continues to maintain a sharper However, Zudio clocked strong recovery in the second half led by the LFL pricing approach along with a strategy to improvement. It registered healthy LFL in multiple markets in Q4FY21 when adjusted deliver quick and new collections to for actual trading days (given second wave related temporary closures in March millennials.” 2021). Relative to the Westside concept, Zudio’s accelerated recovery was also driven by its standalone locations.
Zudio LFL trajectory in FY21 Zudio revenue trajectory
0 5.5
-20 4.4
-40
3.3 (%) -60 (INR bn) 2.2
-80 1.1
-100 Q1FY21 Q2FY21 Q3FY21 Q4FY21 0 FY17 FY18 FY19 FY20 FY21 Zudio Westside
Source: Company, Edelweiss Research Source: Company, Edelweiss Research Store expansion
Zudio’s addition of 68 (includes 15 fitted out stores still to be opened, 53 excluding this) was the highest in the history of the format. Looking at the step-up in aggression on Zudio, we believe Trent has established viability of the format and is now looking at rapidly scale it up. The expansion included further penetration into existing key markets (Gujarat, Karnataka, Maharashtra and Telangana) and entering new territories.
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Zudio state-wise store presence
FY19 FY20 FY21 Gujarat 9 18 28 Karnataka 10 10 27 Maharashtra 15 13 27 Telangana 8 9 15 Rajasthan 0 4 7 Madhya Pradesh 3 3 7 Tamil Nadu 0 5 6 Kerala 0 3 6 Punjab 3 3 5 Odisha 2 2 3 Bihar 0 2 2 Andhra Pradesh 0 2 2 Chhattisgarh NA NA 3 Uttar Pradesh NA NA 3 Haryana NA NA 2 Chandigarh NA NA 1 Uttarakhand NA NA 1 Jharkhand NA NA 1 West Bengal NA NA 1 Goa NA NA 1 Others 6 6 13 Total 56 80 148 Source: Company, Edelweiss Research,
Note: FY21 Includes 15 stores fitted out and ready to be opened
Key MD&A highlights:
Zudio addresses fashion needs of discerning customers at sharp price points with back-end functions entirely integrated with Westside.
As with Westside, the emphasis is on minimizing lead times and landing fresh collections in stores as quickly as possible. The aspiration is to constantly shrink the time window between initial design concept to being available on shelf.
Zudio’s stores are typically 6,000-8,000 sq ft (1/3 of Westside roughly) making it much easier to scale than Westside in terms of real estate availability, in addition to its price appeal to a wider audience.
The capital employed for a new company leased and operated Zudio store is in the region of INR30-40mn including capex, deposits and inventory.
Going forward, Zudio will not be relying on advertising spend, but rather on word of mouth and impulse.
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TRENT
Star Bazaar: Expansion moderates; focus on reducing losses
After the expansion in Star Market in FY20, in FY21 only four market stores were added (taking count to 49) and one Star Hyper store was closed (11 stores). Trent Hypermarket, Trent’s JV with Tesco, which holds majority of Star stores (52 out of 60), reported 4% YoY contraction in revenue in FY21. Stores registered marginal contraction in LFL primarily on account of the Hyper stores located in malls and the pandemic-related restrictions.
EBITDA margin improved from -6.1% to -2.1% YoY along with a reduction in losses. This was driven by emphasis on sharp pricing along with moderation of marketing and other operating expenses.
Store footprint
Trent has a total of 60 Star stores. Trent Hypermarket’s (JV) portfolio of 52 stores comprises 43 Star Market stores and nine Star Hyper primarily concentrated in Bengaluru, Hyderabad, Mumbai and Pune. In addition, Fiora Hypermarket (subsidiary) operates six Star Market stores and two Star Hyper primarily clustered in Ahmedabad and Surat.
Star store split Trent Fiora Total Hypermarket Hypermarket Star Market Stores 43 6 49 Star Hyper 9 2 11 Total 52 8 60 Source: Company, Edelweiss Research
Star has adopted a calibrated approach to expansion in recent years and emphasized the evolution of a sustainable business model. Trent has continued to pursue a clustered approach with stores in Maharashtra, Karnataka, Telangana and Gujarat with an aim of creating local scale and being closer to customers.
Star Bazaar store evolution
FY17 FY18 FY19 FY20 FY21 Hyper 12 12 12 12 11 Daily 19 3 0 0 0 Market 12 20 32 45 49 Total 43 35 44 57 60 Source: Company, Edelweiss Research
Performance summary
Trent Hypermarket reported 4% YoY contraction in revenue in FY21. Stores registered marginal decline in LFL primarily on account of the Hyper stores located in malls and pandemic-related restrictions.
EBITDA margin improved from -6.1% to -2.1% YoY along with a reduction in losses. This was driven by emphasis on sharp pricing along with moderation of marketing and other operating expenses.
Star as a format seeks to set itself apart with focus on quality and competitively priced exclusive brands. In this context, it has continued to expand exclusive range
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TRENT
in defined categories at affordable prices. Star’s exclusive retail brands (excluding staples, fresh & apparel) comprised 9.5% share in FY21.
Trent Hypermarket key financials
Trent Hypermarket (Star) FY17 FY18 FY19 FY20 FY21 Net revenues (INR mn) 8,346 9,395 10,005 12,289 11,851 Revenue growth YoY (%) 12.6 6.5 22.8 (3.6) Number of stores 42 33 39 49 52 Sales per store (INR mn) 199 285 257 251 228 Gross margin (%) 20.3 20.0 22.0 19.3 18.1 EBITDA margin (%) (9.0) (11.0) (8.0) (6.1) (2.1) PAT margin (%) (7.6) (11.9) (9.1) (12.6) (8.0) ROCE (%) (13.5) (19.6) (16.2) (18.9) (10.3) ROE (%) (8.7) (16.8) (13.6) (24.3) (16.8) Source: Company, Edelweiss Research
Fiora Hypermarket (FHL) operates a few of the Star stores in the context of the applicable regulations with respect to FDI in Multi Brand Retail Trading along with three Value Mandi stores.
FHL envisages a phased expansion of Star and Value Mandi stores in select regions. The Value Mandi concept essentially leverages the economies of scale afforded by the Booker wholesale operation to provide a B2C proposition of a concurrent range.
FHL - Key financials
Fiora Hypermarket Limited FY19 FY20 FY21 Key Financials Net revenues (INR mn) 926 1,217 1,204 EBITDA (INR mn) 4 6 0 PAT (INR mn) -9 -113 -129
Key Ratio Revenue growth YoY (%) 31.5 -1.1 Gross margin (%) 21.2 16.5 14.4 EBITDA margin (%) 0.4 0.5 0.0 PAT margin (%) -0.7 -9.4 -10.6 Source: Company, Edelweiss Research
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Fiora Online (FOL) operates the Starquik online platform. Starquik--the online grocery portal--is witnessing encouraging customer traction in micro-markets addressed with revenues having more than doubled over the previous year. In FY21, it reported total revenue of INR739mn.
Fiora Online - Key financials
Fiora Online Limited FY19 FY20 FY21 Key Financials Net revenues (INR mn) 158 332 739 EBITDA (INR mn) -124 -170 -166 PAT (INR mn) -144 -212 -226
Key Ratio Revenue growth YoY (%) 110 123 Gross margin (%) 18 18 16 EBITDA margin (%) -86 -56 -25 PAT margin (%) -43 -29 -68 Source: Company, Edelweiss Research
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Other ventures: Zara growth remains moderate
Unlike its core formats (Westside, Zudio), expansion of Zara has been muted. In fact, the brand has only added one store over the past five years and in FY21 moved out of a city as well.
In case of Booker India, Trent’s cash and carry subsidiary acquired in FY20, six stores were in operation–four in Mumbai, one in Surat and one in Pune. Massimo Dutti’s store count remained constant (three stores), while Landmark added two new stores during the year taking total count to six standalone stores.
Zara
FY21 revenue declined 28% YoY (10% for FY20) primarily owing to stores being shut on account of covid-19. EBITDA margin also fell to 3% in FY21 (15% in FY20).
Zara - key financials
Zara FY17 FY18 FY19 FY20 FY21 Net revenues (INR mn) 10,118 12,200 14,319 15,705 11,261 Revenue growth YoY (%) 20.1 20.6 17.4 9.7 (28.3) Number of stores 20 20 22 22 21 Sales per store (INR mn) 506 610 651 714 536 Gross margin (%) 37.9 42.5 38.3 38.7 30.1 EBITDA margin (%) 9.5 13.9 10.7 15.2 3.2 PAT margin (%) 4.7 6.8 5.0 6.6 (3.7) ROE (%) 15.9 22.7 16.2 20.2 (7.9) Source: Company, Edelweiss Research
Zara - Stores and city reach
FY17 FY18 FY19 FY20 FY21 Stores 20 20 22 22 21 Cities 12 12 10 12 11 Source: Edelweiss Research, Company
Unlike its core formats (Westside, Zudio), expansion for Zara has been muted. In fact, the brand has added only one store over the past five years and in FY21 moved out of a city as well. This is surprising as the past three-four years have seen the entry of two of its biggest global competitors–H&M and Uniqlo–both of which remain aggressive in their expansion plans.
Fast fashion brands reach comparison
H&M Zara Uniqlo Stores 50 21 6 Cities 25 11 3 Source: Company, Edelweiss Research
Massimo Dutti
Revenue for FY21 declined 49% YoY mainly owing to stores being shut on account of covid-19. EBIDTA margin also fell.
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Massimo Dutti - Key financials
Massimo Dutti FY19 FY20 FY21 Net revenues (INR mn) 635 670 341 growth YoY (%) NM 5.5 (49.1) Number of stores 3 3 3 Sales per store (INR mn) 212 223 114 Gross margin (%) 42.4 41.1 39.5 EBITDA margin (%) 6.1 42.4 7.2 PAT margin (%) (3.1) (23.0) (11.9) ROE (%) (6.2) (33.8) (41.4) Source: Company, Edelweiss Research
Booker India
BIL was acquired by Trent in FY20. BIL and its wholly owned subsidiary operate cash and carry stores under the Booker Wholesale banner. During the year, six Booker Wholesale stores were in operation – four in Mumbai, one in Surat and one in Pune.
BIL’s products include staples, processed foods, confectionery, personal care, home care, soft drinks, dairy etc. The concept serves kirana stores, traders, wholesalers, small businesses, hotels, restaurants and caterers. Booker stores operate in catchments with large trader and kirana store presence.
Booker India - Key financials
Booker India Limited FY20 FY21 Net revenues (INR mn) 2,620 3,176 growth YoY (%) 7.5 21.2 Number of stores 6 9 Sales per store (INR mn) 437 353 Gross margin (%) 4 4 EBITDA margin (%) (8.6) (7.1) PAT margin (%) (11.9) (9.8) ROE (%) (32.0) (14.0) Source: Company, Edelweiss Research
Landmark
Landmark added two new stores during the year, taking total count to six standalone stores. In addition to standalone stores, Landmark merchandise is also retailed through select nine Westside locations as a shop-in-shop model.
It has launched a new store format Landmark Xcite with unique products in select micro markets. These stores are fun, young, trendy, with exclusive products in the entertainment & lifestyle space for millennial and Gen Z customers.
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Outlook & valuations: Growth lever ramping up; maintain ‘BUY’ Trent’s success over the past decade has been driven by customers’ affinity to Westside, which has helped drive industry leading SSSG.
We expect pick up in Zudio’s pace and the large value retail opportunity size to drive Trent’s next leg of growth over the coming decade. Zudio has the potential to outpace Westside over the next five years.
Organised value retail size
25.0
20.0
15.0
(USD bn) (USD 10.0
5.0
0.0 2015 2020 2025 (P)
Source: Technopak, Edelweiss Research
Zudio has been the latest entrant in the market (2016) and with Trent’s experience, along with sharing supply chain Westside supply chain, it has the right things in place to profitably scale the business.
Value retailers store count Value retailers revenues (FY20)
1000 75.0
800 60.0
600 45.0
400 bn) (INR 30.0 (#of stores)
200 15.0
0 0.0
Zudio
Zudio
Max
Max
V-Mart
V-Mart
fashion
fashion
Trends
Trends
Reliance
Reliance Pantaloons Pantaloons Source: Technopak, Edelweiss Research Source: Technopak, Edelweiss Research
Hence, we increase our target EV/EBITDA multiple for the standalone business (Westside + Zudio) to 45x (40x earlier) and we roll over valuation to Q3FY23E, which gives us a revised TP of INR1,056 (INR 899 earlier). Valuations are at a premium, but Trent’s success/execution with Westside’s scale-up instils confidence that it can replicate the same with Zudio. Maintain ‘BUY’.
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Key risks remain: a) Sub-optimal economics for Zudio’s new stores. b) E-commerce. However, Westside’s performance during FY16-20--during peak of e-commerce growth and discounting—lends comfort on that aspect.
Trent valuation summary Dec'22E Target Per share Trent Methodology INR mn multiple contribution Standalone (Westside + Zudio + Landmark) EBITDA 7,771 EV/EBITDA 45x 3,49,706 Star Bazaar (50% ownership) Sales 12,444 P/Sales 1.5x 9,333 Zara business (49% ownership) Sales 17,915 P/Sales 4.5x 39,502 Others (Fiora Hypermarket) Sales 1,446 P/Sales 1.5x 2,169 EV (INR mn) 4,00,709 Less debt (INR mn) 27,421 Add: cash + investments (INR mn) 2,183 Market cap (INR mn) 3,75,470 No of shares (mn) 355 Value per share (INR) 1,056 Source: Edelweiss Research
Trent's one year forward EV/EBITDA
90.0
72.0
54.0 (x) 36.0
18.0
0.0
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20 Apr-21
Source: Bloomberg, Edelweiss Research
Valuation of Retail companies
FY20-23E FY20-23E FY20 P/E (x) EV/EBITDA (x) M Cap Sales EBITDA EBITDA Company Name (USD bn) CAGR (%) CAGR (%) margin (%) FY20 FY21E FY22E FY23E FY20 FY21E FY22 FY23 Domestic companies Avenue Supermart (DMart) 29.2 20.6 21.1 8.6 167.5 198.2 131.7 88.3 101.9 124.4 84.5 57.4 Titan Co Ltd 21.0 13.6 15.2 11.9 104.8 160.7 79.4 62.7 64.4 92.1 52.5 42.1 Page Industries Ltd 4.5 12.6 18.8 18.4 98.3 99.1 71.0 55.3 62.8 63.5 47.3 37.4 Trent Ltd 4.3 14.4 15.0 15.6 NM NM 2509.6 127.4 62.6 197.8 74.1 41.1 Relaxo Footwears Ltd 3.9 12.0 16.9 17.1 129.7 100.6 93.4 72.9 71.2 58.7 54.7 44.6 ABFRL 2.7 3.9 8.1 13.8 NM NM (453.9) 72.0 18.8 41.2 21.3 14.9 Bata India Ltd 2.7 5.2 3.2 27.3 62.0 NM 84.5 44.5 24.4 125.3 35.1 22.1 V-Mart Retail Ltd 0.8 10.8 13.4 12.9 119.9 NM 131.3 62.2 28.7 46.8 28.5 19.7 Lux Industries Ltd 1.5 28.5 38.8 15.4 92.6 42.1 37.5 31.7 60.1 29.4 26.4 22.5 TCNS Clothing Co Ltd 0.5 4.9 9.9 16.2 51.5 (63.4) 47.3 33.9 20.0 1524.5 18.5 15.0 Shoppers Stop Ltd 0.4 1.6 (1.8) 17.4 NM NM NM 60.7 8.3 103.7 13.7 8.8 Arvind Fashions Ltd 0.2 1.8 15.2 6.0 NM NM NM NM 13.8 NM 20.3 9.0 Dollar Industries Ltd 0.2 12.5 24.1 11.0 32.2 21.6 17.0 14.0 18.8 14.2 11.6 9.9 Average 10.9 15.2 14.7 95.4 79.9 249.9 60.5 42.8 201.8 37.6 26.5 Median 12.0 15.2 15.4 98.3 99.1 79.4 61.4 28.7 77.8 28.5 22.1 Source: Bloomberg, Edelweiss Research
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Additional Data Management Holdings – Top 10* CEO Stephen Rayfield % Holding % Holding ED & CFO P. Venkatasalu ARISAIG 6.53 HDFC Life 1.47 HDFC AMC 3.50 Sundaram AMC 1.46 CS M.M. Surti Amansa 2.48 SBI Life 1.38 Director N. N. Tata L&T MF 1.61 Axis AMC 0.92 Auditor Deloitte Haskins & Sells LLP Franklin 1.51 Reliance Capita 0.88
*Latest public data
Recent Company Research Recent Sector Research Date Title Price Reco Date Name of Co./Sector Title Growth outlook outshines Second wave dents margin further; 30-Apr-21 777.15 Buy 10-Jul-21 Avenue Supermarts uncertainty; Result Update Result Update Limiting discounting; driving Another wave, but a little different; 12-Feb-21 670 Buy 08-Jul-21 Retail growth; Company Update Sector Update Stable recovery; margins steal the Café to top up growth further; 04-Feb-21 670 Buy 17-Jun-21 Burger King show; Result Update Company Update
Rating Interpretation Daily Volume 30 950 TP 786 820 24
690 TP 18 (INR) 590
560 (Mn) TP 12 415 430 6 300 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 0 TRENT IN Equity Buy Hold Reduce Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
Source: Bloomberg, Edelweiss research Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage Rating Rationale
Buy Hold Reduce Total Rating Expected absolute returns over 12 months
Rating Distribution* 168 55 19 243 Buy: >15%
>50bn >10bn and <50bn <10bn Total Hold: >15% and <-5%
Market Cap (INR) 215 41 3 259 Reduce: <-5% *1 stocks under review
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