Trent Ltd (TRENT)

CMP: | 435 Target: | 500 ( 15%) Target Period: 12 months BUY

July 8, 2019

Store addition trajectory to further accelerate…

Westside continues to register healthy SSSG E s

Company Update
Westside continues to be one of the most successful, established franchises Particulars
in the women’s wear category. With steady same store sales growth (8%) Particular Amount
and aggressive store addition (added 25 stores: highest store addition Market Capitalisation (| Crore) 14,455.1
historically in a single year); revenues from the Westside format grew Total Debt (Mar-19) (| Crore) 494.1
robustly by 17% YoY in FY19. Private label brands continue to dominate the
Cash (Mar-19) (| Crore) 54.2
product portfolio with the share now touching 97% (from 80% in FY13). On EV (| Crore) 14,895.0
the profitability front, gross margins for Westside format declined 210 bps 52 week H/L (adjusted) 464 / 308
YoY to 57.9%, mainly owing to price rationalisation in selected categories of Equity Capital (| Crore) 33.2
menswear and kidswear. However, on account of controlled opex, EBITDA
Face Value (|) 1.0
margins remained constant at 11% YoY. With the recent capital infusion
(~| 950 crore) by promoters, we expect the store addition pace to further Price Movement
accelerate. Subsequently, we bake in higher store addition for Westside
during FY20, FY21E (30 stores vs. previous estimate of 22 stores) and expect
14,000 500
revenues to grow at a CAGR of 23% in FY19-21E.
12,000 400
Zudio next growth engine in making… 10,000
300
8,000
Acquired in FY18, ‘Zudio’ is a value fashion apparel player. It addresses the 200
6,000
fast and edgy fashion needs of the customers at sharper price points (two-

ICICI Securities – Retail Equity Research

4,000 100
third product offerings less than <| 500) with infrastructure and backend
processes closely aligned with Westside. This enables it to drive better 2,000 0

Sep-18
Feb-19
Dec-16

Jan-18
Jul-16

Jul-19
May-18
Aug-17
Apr-17
efficiencies. Zudio has adopted accelerated store expansion programme, as
it added 33 stores taking total store count to 40 standalone Zudio stores (it
also has a presence in 16 star locations). Revenues grew 42% YoY to | 204.0 Price (R.H.S) Nifty (L.H.S)
crore. Though gross margins profile for Zudio is lower compared to
Key Highlights
Westside (~40% vs. 60%), certain independent stores generated
~| 14000/sq ft (one of the highest amongst industry players).  Expected capital infusion (| 950
crore) to accelerate store expansion
Capital infusion by promoters to accelerate store expansion….
 Revenues from Zudio format grew
The expected capital infusion (| 950 crore) by promoters (Tata Sons) is likely robustly by 42% YoY to | 204 crore
to act as a key catalyst for healthy revenue growth. The capital to be raised in FY19
can provide a strong fillip for store addition pace. A substantial amount is
also expected to be invested in enhancing warehousing capacity and supply  Share of private label brands for
chain. The management is working on a pilot project wherein the lead time Westside improved 100 bps YoY to
(from designing stage to store) is expected to be compressed to 40 days 97%
from the current about two months. This would entail higher investments in Research Analyst
inventory (intermediary goods) and an effective distribution chain.
Bharat Chhoda
Incorporating the recent developments, we revise our estimates upwards bharat.chhoda@icicisecurities.com
and expect revenues to grow at a CAGR of 23% in FY19-21E with EBITDA
margin expansion of 130 bps to 10.0% by FY21E. Enhanced revenue Cheragh Sidhwa
cheragh.sidhwa@icicisecurities.com
visibility along with higher promoter commitment signifies positive
momentum in core business performance metrics. Hence, we reiterate our
BUY rating with an SOTP target price of | 500.
Key Financial Summary
(| Crore) FY17 FY18 FY19 FY20E FY21E CAGR (FY19-21E)
Net Sales 1,833.9 2,157.5 2,630.2 3,281.4 4,009.2 23.5%
EBITDA 125.7 201.2 227.7 312.3 405.2 33.4%
PAT 84.9 87.0 94.9 176.4 244.7
EV/Sales (x) 8.1 6.9 5.7 4.7 3.9
EV/EBITDA (x) 117.9 73.6 65.4 49.2 38.7
RoCE (%) 7.4 10.0 10.1 9.4 11.5
RoE (%) 3.8 5.5 5.8 6.5 8.6
Source: Company, ICICI Direct Research
 Company Update | Trent Ltd ICICI Direct Research

Westside: Profitable business model set to accelerate…..

Westside (~90% of revenues) continued to deliver a superior performance
with healthy revenue growth of 17% YoY in FY19. Westside is considered
one of the most successful and established franchises, consistently
delivering high single digit SSSG (FY13: 7%, FY14: 9%, FY15: 11%, FY16:
8%, FY17: 9%, FY18: 9% and FY19: 9%).
Westside continues to focus on key initiatives such as:
a) delivering latest fashion trends at sharp prices
b) strengthening additional differentiator categories such as lingerie
(Wunderlove), cosmetics (Studiowest) and athleisure (StudioFit)
with trendy offerings
c) accelerated store expansion programme to scale up reach
d) focus on latest fashion each week through a ‘fast fashion anchored
supply chain
e) progressing Omni-channel proposition through integration between
stores and online
Exhibit 1: Westside revenue trend and same store sales growth (SSSG)

25

20 20
18 18 17 17
15 16
14
10 11
9 8 9 9 9
7
5

0
FY13 FY14 FY15 FY16 FY17 FY18 FY19

Total sales growth (%) LTL growth (%)

Source: Company, ICICI Direct Research

The management accelerated its store expansion pace in FY19 by adding

record number of stores (added 25 Westside stores in FY19 vs. 18 in FY18).
Westside has a presence with 150 stores across 70 cites and online reach
across India exclusively through ‘Tata CLiQ’. The management believes
there is significant growth potential in non-metro cities and continuously
monitors opportunities in these markets. With the recent capital infusion
(~| 950 crore) by promoters, we expect the store addition pace to further
accelerate. Subsequently, we bake in higher store addition for Westside
during FY20, FY21E (30 stores each year).
Exhibit 2: Westside Store addition trend
250
210
200 180
150 Average size of store around ~18000/sq ft., with
150 125 investments in fit-outs of ~| 2500/sq ft. Total
Total Stores

107 investment in a new Westside store leased and

95
100 operated by the company is | 6-7 crore (including
deposits and inventory)
50

0
FY16 FY17 FY18E FY19 FY20E FY21E

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 2

 Company Update | Trent Ltd ICICI Direct Research

Westside has proven to be one of the most profitable business models as it

primarily focuses on selling private label brands. Share of private label
brands have improved significantly from 80% in FY13 to 97% in FY19. In-
house brands offer higher margins to retailers as they allow them to have
complete control across the value chain right from designing merchandise,
branding, sourcing, logistics, distribution, promotion, display, fixing price
points and retail margins.
Its own brands like Wunderlove (Lingerie), Studiowest (Cosmetics) and
Bombay Paisley (fusion wear) have grown at a rapid pace. For instance,
Wunderlove brand, which had a 24% share (FY13) in Westside’s lingerie
wear segment has scaled up to ~100% in FY19.

Exhibit 3: Private label brand contribution to revenues (%) Exhibit 4: Share of Wunderlove in lingerie (%)

100 97 120
96
100
95 93 24 23
80 35
90 55
90 87 60 83

%
99.8
40
%

76 77
85 83 65
20 45
17
80 0 0.2
FY14 FY15 FY16 FY17 FY18 FY19
75
FY14 FY15 FY16 FY17 FY18 FY19 External Brands Wunderlove

Source: Company, ICICI Direct Research

Source: Company, ICICI Direct Research

Exhibit 5: Westside continues to expand its footprint, with Exhibit 6: Trent refurbishes nine Westside stores, translating
combination of micro markets as well as in Tier I cities to 24% growth in footfalls to 45 million customers in FY19
East
8% 50 44.96
45
40 36.14
North 35
26% 30 25.15 26.14
24.33 24.57
In million

25
20
West 15
38% 10
5
South 0
28% FY14 FY15 FY16 FY17 FY18 FY19

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 3

 Company Update | Trent Ltd ICICI Direct Research

Exhibit 7: Sales per sq ft grows at CAGR of 5% in F14-19 Exhibit 8: Average ticket size trend

12000 2500 2332

10225 2197
9581 9980 2029
10000 8791 9132 1860
2000 1700
7969
8000 1543
1500
6000
|

|
1000
4000

2000 500

0 0
FY14 FY15 FY16 FY17 FY18 FY19 FY14 FY15 FY16 FY17 FY18 FY19

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 9: Loyalty members grow 14% to more than 50 lakh Exhibit 10: Shrinkage in cost trend
6
5.1 0.60%
5 4.5
0.50% 0.50%
Million customers

4 3.53 0.40%
3 2.76
0.30% 0.28%
2.11 0.24%
2 0.20% 0.22% 0.16%
1.39 1.47 1.53 0.18%
0.12%
1 0.10%

0.00%
0
FY13 FY14 FY15 FY16 FY17 FY18 FY19
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 4

 Company Update | Trent Ltd ICICI Direct Research

Zudio: Aiding growth in value fashion format…

Acquired in FY18, ‘Zudio’ is a value fashion apparel player. It addresses the
fast and edgy fashion needs of the customers at sharper price points (two-
third product offerings less than <| 500) with infrastructure and backend
processes closely aligned with Westside. This enables it to drive better
efficiencies. Sighting the vast opportunity in value fashion segment, Zudio
adopted the accelerated store expansion programme, as it added 33 stores
taking total store count to 40 standalone Zudio stores (it also has a presence
in 16 star locations). The average store size of Zudio is 6000-8000 per sq ft,
with total capital employed of | 3-4 crore/store (including inventory, capex
and deposit).
Zudio stores have 100% own brands aimed at providing latest trends at
affordable pricing. Revenues in FY19 grew 42% YoY to | 204.0 crore.
Though gross margins profile for Zudio is lower compared to Westside
(~40% vs. 60%), certain independent stores generated ~| 14000
revenue/sq ft (one of the highest among industry players). Existing stores
are delivering healthy SSSG while new stores are witnessing quick traction
without significant spend on promotions and advertisements.
Trent sees value fashion as one of the growth drivers in the medium to long
term and intends to scale up the brand significantly in coming years. We
model in 35 store addition each year taking total store count to 110 Zudio
stores by FY21E.

Exhibit 11: Zudio revenue trend

250
204
200
144
150
118
| crore

96 104 103
100

50

0
FY14 FY15 FY16 FY17 FY18 FY19

Source: Company, ICICI Direct Research. Includes sales from Zudio Standalone, Star and Tatacliq

Exhibit 12: Zudio store addition pace…

120 110

100

80 75
No. of stores

60
40
40

20
7
0
FY18 FY19 FY20E FY21E
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 5

 Company Update | Trent Ltd ICICI Direct Research

Star to focus on enhancing share of private label brands

FY18 and FY19 were consolidated years for Star, as the company shut all 19
loss making Star dailies (<2000 sq ft). The management believes the “Star
Market” format (5000-15000 sq. ft.) is a more sustainable one and added 19
stores in FY18-19. Currently, it has 32 Star Market stores and 12 Star Hyper
stores (~20000 sq ft). The company follows a cluster based approach with
stores in Maharashtra, Telangana, Karnataka and Gujarat.
Over time, THPL has positioned itself as a distinct retailer famous for ‘fresh
and food’, which has proved to be a key footfall driver for Star. The company
directly engages with over 250 farmers and sources 70% of fresh vegetables
directly from farmers.
The management is focusing on enhancing the share of private label brands
to improve gross margins (500-1000 bps higher gross margins compared to
third party brands). As on FY19, the company had ~300 SKUs of private
labels (200 SKUs in FY18), which witnessed healthy offtake in FY19.
Subsequently, gross margins improved 200 bps YoY to 22% in FY19. While
revenue growth in FY19 was moderate (6.5% YoY to | 1000 crore) due to
store rationalisation, EBITDA losses narrowed down to | 80.2 crore vs.
| 103.5 crore in FY18. Rightsizing of the store model, along with enhanced
private label share, would improve profitability, going forward.

Exhibit 13: Stores trend

50 43 44
40 35
32
30 26
19 19 20
20 13 12 10 12 12 12 12
10 5 4 3
1 0
0
FY15 FY16 FY17 FY18 FY19

Star Hyper Star Daily Star Market Total THL Stores

Source: Company, ICICI Direct Research

Exhibit 14: Revenue trend

1200
962 1008
1000 891
795 840
790
800
| crore

600

400

200

0
FY14 FY15 FY16 FY17 FY18 FY19

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 6

 Company Update | Trent Ltd ICICI Direct Research

Margins under stress for Zara…

Despite moderate store addition (added only two stores), Zara maintained
its healthy revenue trajectory. Revenues grew 17% YoY to | 1431.9 crore,
depicting healthy SSSG in FY19. However, EBITDA margins witnessed a
sharp decline of 320 bps YoY to 10.7%, mainly on account of a decline in
gross margins by 400 bps. The company has limited scope of sourcing
inventory, as it is obligated to source merchandise only from Inditex group
(imported). The recent increase in custom duty on readymade garments
(from 10 to 20% in July 2018) and inability to pass on prices due to
competitive scenario, may have impacted margins negatively.
The management intends to steadily expand the presence of Zara stores
over the next three to four years, primarily in the major cities (currently
operates 20 stores).

Exhibit 15: Revenues grow at impressive CAGR of 20% in FY16-19

1600 1432
1400
1220
1200
1012
1000 840
| crore

800
600
400
200
0
FY16 FY17 FY18 FY19
Source: Company, ICICI Direct Research

Exhibit 16: Number of stores: Zara

25
22
20 20
20 18
16
No. of stores

15

10

-
FY15 FY16 FY17 FY18 FY19
Source: Company, ICICI Direct Research

Exhibit 17: Valuation

FY21E (| cr) Targeted
Financial Target Multiple EV/Mcap Debt
(| cr) Cash Mcap (| cr)
Standalone revenues Sales 3914 3.7x EV/Sales 14482 174 338 14318
Trent Hypermarket Ltd Sales 596 1.0x Price/Sales 620 620
Trent -Inditex (Zara) Sales 938 3.0x Price/Sales 2852 2852
Target Market Cap. (| cr) 17791
Target Price (|) 500
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 7

 Company Update | Trent Ltd ICICI Direct Research

Financial summary

Exhibit 18: Profit and loss statement | crore Exhibit 19: Cash flow statement | crore
(Year-end March) FY18 FY19 FY20E FY21E (Year-end March) FY18 FY19 FY20E FY21E
Total operating Income 2,157.5 2,630.2 3,281.4 4,009.2 Profit after tax 87.0 94.9 176.4 244.7
Growth (%) 17.6 21.9 24.8 22.2 Add: Depreciation 45.5 51.7 67.0 82.2
Cost of Goods Sold 1,031.5 1,311.4 1,634.2 1,976.5 (Inc)/dec in Current Assets -68.2 -217.6 -295.0 -333.7
Gross Margin (%) 52.2 50.1 50.2 50.7 Inc/(dec) in CL and Provisions 65.3 68.8 60.1 77.3
Employee Expenses 230.5 286.8 347.8 417.0 Others 0.0 0.0 0.0 0.0
Operating & Other Expenses 694.3 804.3 987.2 1,210.5 CF from operating activities 129.6 -2.2 8.5 70.5
Total Operating Expenditure 1,956.3 2,402.5 2,969.2 3,604.0 (Inc)/dec in Investments 57.6 140.7 9.2 3.6
EBITDA 201.2 227.7 312.3 405.2 (Inc)/dec in Fixed Assets -82.4 -74.4 -300.0 -300.0
Growth (%) 60.0 13.2 37.1 29.7 (Inc)/dec in CWIP -4.1 -77.6 17.2 5.0
Depreciation 45.5 51.7 67.0 82.2 Others -68.9 -24.8 -9.4 -10.4
Interest 30.6 36.8 28.2 25.4 CF from investing activities -97.7 -36.0 -283.1 -301.7
Other Income 44.2 40.8 42.7 44.1 Issue/(Buy back) of Equity 0.0 0.0 2.5 0.0
PBT 169.3 180.1 259.7 341.7 Inc/(dec) in loan funds -4.3 102.7 -117.7 -38.3
Total Tax 59.6 73.6 90.9 119.6 Others -29.0 -43.1 877.0 -97.8
PAT 109.7 106.5 168.8 222.1 CF from financing activities -33.4 59.6 761.8 -136.2
Minority Interest 0.0 0.0 0.1 0.1 Net Cash flow -1.5 21.4 487.2 -367.4
Share of Profit from JV -22.6 -11.7 7.7 22.6 Opening Cash 34.3 32.8 54.2 541.4
PAT 87.0 94.9 176.4 244.7 Closing Cash 32.8 54.2 541.4 174.0
Growth (%) 9.0 85.9 38.7 Source: Company, ICICI Direct Research
Extraordinary item 0.0 0.0 0.0 0.0
Reported PAT 87.0 94.9 176.4 244.7
EPS (|) 2.6 2.9 4.9 6.9
Source: Company, ICICI Direct Research

Exhibit 20: Balance sheet | crore Exhibit 21: Key ratios

(Year-end March) FY18 FY19 FY20E FY21E (Year-end March) FY18 FY19 FY20E FY21E
Liabilities Per share data (|) (annualised)
Equity Capital 33.2 33.2 35.7 35.7 EPS 2.6 2.9 4.9 6.9
Reserve and Surplus 1,562.1 1,613.3 2,666.7 2,813.5 Cash EPS 4.0 4.4 6.8 9.2
Total Shareholders funds 1,595.4 1,646.5 2,702.4 2,849.2 BV 48.0 49.5 75.7 79.8
Total Debt 391.4 494.1 376.4 338.1 DPS 1.2 1.4 2.0 2.7
Other LT Liabilities 2.3 0.4 0.5 0.5 Cash Per Share 1.0 1.6 15.2 4.9
Deferred Tax Liability 19.3 25.5 25.5 25.5 Operating Ratios
Minority Interest / Others 0.8 -2.9 -2.9 -2.9 EBITDA Margin (%) 9.3 8.7 9.5 10.1
Total Liabilities 2,009.2 2,163.7 3,101.9 3,210.4 PBT Margin (%) 7.8 6.8 7.9 8.5
Assets PAT Margin (%) 4.0 3.6 5.4 6.1
Gross Block 742.9 817.1 1,117.1 1,417.1 Inventory days 58.3 69.0 75.0 79.0
Less: Acc Depreciation 231.5 255.6 322.6 404.8 Debtor days 2.6 2.3 2.5 2.5
Capital WIP 9.6 87.2 70.0 65.0 Creditor days 35.3 34.0 32.4 32.0
Total Fixed Assets 521.0 648.7 864.5 1,077.3 Return Ratios (%)
Investments 1,056.0 915.3 906.1 902.5 RoE 5.5 5.8 6.5 8.6
Other Non-current Assets 97.1 94.3 103.7 114.1 RoCE 10.0 10.1 9.4 11.5
Goodwill 67.9 68.2 68.2 68.2 RoIC 17.5 16.2 15.7 15.8
Deferred Tax Asset 0.0 0.0 0.0 0.0 Valuation Ratios (x) (annualised)
Inventory 344.8 497.0 674.3 867.7 P/E 166.1 152.4 88.0 63.4
Debtors 15.1 16.5 22.5 27.5 EV / EBITDA 73.6 65.4 49.2 38.7
Loans and Advances 140.3 182.8 274.1 383.8 EV / Net Sales 6.9 5.7 4.7 3.9
Cash 32.8 54.2 541.4 174.0 Market Cap / Sales 6.7 5.5 4.7 3.9
Other Current Assets 60.3 81.8 102.2 127.8 Price to Book Value 9.1 8.8 5.7 5.5
Total Current Assets 593.3 832.3 1,614.4 1,580.7 Solvency Ratios
Creditors 208.4 245.0 291.0 352.0 Debt/EBITDA 1.9 2.2 1.2 0.8
Other Current Liab. & Prov. 117.8 150.1 164.1 180.4 Debt / Equity 0.2 0.3 0.1 0.1
Total Current Liabilities 326.2 395.0 455.1 532.4 Current Ratio 2.4 2.9 3.4 3.7
Net Current Assets 267.1 437.2 1,159.4 1,048.3 Quick Ratio 0.9 1.1 1.3 1.4
Application of Funds 2,009.2 2,163.7 3,101.9 3,210.4 Source: Company, ICICI Direct Research
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 8

 Company Update | Trent Ltd ICICI Direct Research

RATING RATIONALE
ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,
Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined
as the analysts' valuation for a stock

Buy: >15%
Hold: -5% to 15%;
Reduce: -15% to -5%;
Sell: <-15%

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

ICICI Securities | Retail Research 9

 Company Update | Trent Ltd ICICI Direct Research

ANALYST CERTIFICATION
/We, Bharat Chhoda, MBA; Cheragh Sidhwa MBA , Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the
subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned
Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report

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