For Trent,  sustained revenue growth key  to keep up the trend

Year-on-year (y-o-y), standalone revenue growth was 61% to ₹2,171 crore led by store expansion specifically in Zudio, which is the company’s value fashion concept. In the nine-month period ending December, Trent has added 93 Zudio stores and 11 Westside stores. Trent’s flagship concept, Westside too saw healthy traction. In Q3, this store format saw a like-for-like growth of 17% y-o-y. Overall, Trent’s three-year revenue compound annual growth rate (CAGR) stood at almost 36% in Q3 and that’s nothing to sneeze at.

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The stock closed higher by nearly 9% on Thursday, taking the gains in the past one year to over 25%. Sustained revenue growth ahead is crucial to keep the stock momentum upbeat. Investors would also do well to track the margin trajectory, which has not met expectations in the last three quarters.

Q3 Ebitda (earnings before interest, tax, depreciation and amortization) growth on a three-year CAGR basis was relatively lower at 25%. Ebitda margin fell by 619 basis points y-o-y to 15.5%. Rising share of Zudio stores that cater to the lower price point product range is a key reason weighing on profitability. While Trent is adding stores at a faster pace, the operating leverage is yet to play out fully. Thus, some analysts have cut Trent’s FY24 Ebitda estimates.

Trent’s peers in the value segment such as V-Mart Retail Ltd are facing the brunt of the K-shaped economic recovery. Demand in the mass segment continues to be weak. Against this backdrop, it helps that Zudio is faring well.

“While the discretionary category is seeing a challenging demand environment, Trent has continued to grow at a healthy pace with steady same store sales growth,” said analysts at Motilal Oswal Financial Services Ltd in a 9 February report. Nevertheless, signs of slowdown in urban demand necessitates closer monitoring. Worries over the demand slowdown are likely to have weighed on Trent’s shares, which are down by 14% from their 52-week highs of ₹1,566 apiece. Still, valuations are not exactly cheap.

Post Q3 results, analysts from Kotak Institutional Equities have cut their FY2024-25E earnings per share by 3-4% on more modest margin assumptions. “This leads to a revised fair value of ₹1,300 ( ₹1,320 earlier),” said the analysts in a report. Trent’s shares closed at ₹1,341.90 apiece on Thursday.