Trent -- A value unlocking story from the house of TATA

Stock Opportunities
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A lot of has happened since last post on this thread. Stock has corrected by ~ 40% from Feb highs.

We need to assess impact of Corona on Business models of Westside, Zudio, Star and Zara

Fixed Costs in lockdown period

  • Most stores would be Franchisee owned, hence contractually the fixed costs of rent, electricity have to be paid by Franchisee. MOSL report after Q2 FY20 also states that for Zudio the rent and electricity are to be paid by Franchisee.
  • Fixed cost for Trent would be
    Employee cost - FY20 9M: Rs 269 crores
    Rent and Interest on cash basis (Pre Ind AS 116) in FY19 was: Rs ~ 350 crores
    Other fixed cost taken conservatively would mean annual fixed cost of Rs 750-800 crores.i.e. Rs 65-80 crores of fixed cost per month on cash basis.

Franchisee subvention in lockdown period
Depends on industry practice as there is no precedent. Logically, should not be there but possibility exists. There is a higher chance that the Franchisee would reneg the lease rentals with the Landlord.

Time taken to resume to 100% operations
This is a very tricky aspect. 2 Days back, Bill Gates said in an interview to CNBC that vaccine for coronavirus will take around 18 months plus after that to produce that for 7 billion people and vaccinate them is going to take even more time. One has to take a judgement call here so as to whether only lockdown will be enough to get rid of coronavirus in India and when. Most stores are located in Maharashtra which is the hardest hit state and other metros which one would assume will be the last to come out of lockdowns.

After lifting of lockdown also people would be fearful and brick and mortar stores would be adversely affected atleast till the virus fear has been completely eradicated.

Even after the virus fear is over, IMO it will take time for the stores to reach current SSG growth rates

For eg,In past downturns, SSG has fallen in line with reduction in GDP growth rates in 2009 and 2012 and recovery has been gradual.

westsidessg12

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Needless to say, management would not be inclined to add stores in the near term, delaying the expansion.

Growth rates factored into the lofty valuations earlier will undergo large changes.

All in all, extreme headwinds for the apparel retail industry as a whole esp for brick and mortar. Although Trent stock has been more resilient compared to more than 50% drawdowns seen by FRL, FLFL, ABFRL and Shoppers Stop.

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Thanks a lot for sharing this. I honestly have no idea how this lockdown will play out in this sector. We can’t but have to wait for the results to see the actual numbers.

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Trent has started 3 hour delivery service with the soft launch of starquik. They will be starting to cover all across India. Currently they have started in few states.

Its omnichannel model and no warehousing model like bigbasket and grofers. Orders gets picked up from nearby store and delivered in 3 hours. Similar model is also started by Dmart.

https://www.starquik.com/

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Disc - Top 5 holding in my portfolio.

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Agree they started starquik but I was bit disappointed as my place is just within 3 km of their store but they refused delivery based on pin code much earlier before lockdown started. Also their website was fine but main aspect was sloppy whether delivery is possible or not they tell in end. Customer care was fine and responsive but not of much use. I am a star bazaar person but they were of no use in home delivery. Anyways, just like all Tata firms I expect them to slowly and steadily improve. Good to know it’s your top 5 holdings. Trent is still majorly fashion play though star will grow meaningfully. I had far more expectations from starquik, same as I had for Tata global beverage earlier. Still a long way to go for Tatas in consumer business…lot to learn for them … hopefully with chandra they take right decisions …and quickly… btw what are your reason for holding trent significantly…is it for fashion or something else?

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Where can i locate call transcript - for Trent? Thanks.

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Trent has turned into black this Q vs a net loss last year. Revenue growth until Feb 2020 are good and post that understandably not good. Noel Tata sounds very confident in his commentry for coming year and new store additions momentum. Surprisingly not much details on star market and star quik online Grocery as during lockdown these two must have performed well.
Experts tracking this firm, what are your views on this Q results and future ahead for stock with current valuations? Will Westside and zudio recover back to growth once lockdown lifted? Also any breakup on star and star quik numbers? Thanks

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Trent has done well at operating level. Interest and Depreciation has jumped significantly.

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This is a wrong interpretation of the result. Interest and depreciation is not comparable to previous quarters mainly because of adoption of IND AS 116 in FY2020. In IND AS 116 all the operating leases are converted into financial lease which means to record the asset and an equal amount on the liablity side therefore we can see huge amount of depreciation and interest cost.

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@Aman_Madrecha - Thanks for correcting.

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The move is expected to be a part of the Tatas’ super-app play and will open another front in the grocery commerce wars between Reliance JioMart, Amazon India and Walmart-owned Flipkart besides startups like Grofers.
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The conglomerate had set up Tata Digital last year for the effort. “There could be a potential tie-up with Trent-owned Star Bazaar as well for pick-up and distribution,” said another source briefed on the matter.

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Not sure what’s going on here and how it will be positive for Trent or rather how much positive. Tatas seem to focus on ecommerce play via Tata digital, something like how RIL doing with Jio Platforms. Trent already has a ecommerce Star quik…what will happen to that and what’s long term vision for that and why ecommerce is not done via Trent and also same via Reliance Retail is something to ponder on…any insights would be welcome.
Interestingly only dmart would work upon ecommerce, if any, via it’s same listed entity which holds the offline retail.

Disc. Hold Avenue supermart and Trent hence can be biased. Not a recommendation to buy/sell

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Generic question - How can we find which of listed company shall own superApp? Or would it be unlisted or yet to be formed company? Similarly BigBasket Stake - which listed entity would buy it?

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Possibly because these ventures are still loss making.

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It is housed under an unlisted company called Tata Digital; this company is working on the super app.

Big Basket would most likely be held directly by Tata Sons or some other unlisted company. Possibility of this coming to Trent or even Tata Consumer products is very slim.

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Can u tell why Trent’s ROCE is 18% but ROE is 7% only? Nil Debt is one factor and other is they raised capital in 2019 . What are others?

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Anyone aware of reason of recent run up of Trent in falling markets last few days? BB acquisition is via Tata group so is market considering some huge synergy of acquired BB (by other Tata Group company, maybe Tata digital) and Trent?
I am aware the recent results were also decent, just trying to figure out if I am not aware of any more business reasons or anything related to BB acquisition that may benefit Trent tremendously, because I had thought the acquisition was already priced in few weeks back.

Disc: Invested, biased. Not a buy/sell recommendation.

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There is rarely any solid rationale for re-rating in a bull market. To my view, this is just a catch-up rally. Trent hasn’t moved much in these bull run. And I am seeing a number of similar stocks, which didn’t participate in the rally previously, have moved up sharply in the last month. Examples are Shankara Building Products, Khadims, VRL Logistics etc.

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My notes from the annual report:

  • Salary cuts: management -37%, other employees -9.3%, but can’t be naively compared due to incentive payments/overtime etc. In FY20, employees remuneration was raised by 12.8%, management was lowered by 8.3%.
Management Remuneration Change FY21 Remuneration Change FY20
Mr. N. N. Tata (33.71%) 16.97%
Mr. P. Auld (MD) (43.08%) (15.87%)
Mr. Venkatesalu (CFO) (24.77%) 12.43%
Mr. M. M. Surti (Secretary) (25.79%) (8.76%)

  • CSR spend was 3 Cr. 33% towards covid relief, 33% towards education.

  • Emerging themes that Trent expects to benefit from:

    • Women are being integrated into the formal workforce and have a greater control over personal and household financial decision making;
    • Rising disposable income and increasing spend on apparel, personal care;
    • Consumption rising across tier I-III cities;
    • e-commerce and social media presence influencing shopping trends;
    • Supply side innovations, improved manufacturing capabilities, efficient warehousing & distribution.

  • 75% of the addressable market is in mass priced / value fashion. (Will this percentage go down if their emerging trends are correct?)

Retail Outlets

Retail Outlets
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Brand No. of stores FY21 No. of stores FY20 No. of stores FY19 No. of cities FY21 No. of cities FY20 No. of cities FY19
Westside 174 165 150 90 87 76
Zudio 133 80 40 57 44 25
Star 60 57 44 7 7 7
Zara 21 22 22 11 12 10
Booker 9 6 - 3 3 -
Landmark 6 4 5 4 3 4
Utsa 4 3 - 4 2 -
Massimo Dutti 3 2 3 2 2 2
  • Zudio is expanding the fastest, kept up the pace during pandemic year.
  • Star is present in 7 cities, increasing footprint in those 7, not in new ones. Same takeaway for Booker.
  • Zara numbers are bizarre. It looks like they closed two stores in FY20 and opened two more in different cities, leaving the overall number unchanged. Then in FY21, they closed down one store. Similar story with Landmark, number of cities dropping from 4 → 3 → 4.

Westside

  • Over 85% of merchandise is sourced from within India.

  • Business model based on in-house design, allows for fast conversion from concept to products. (Pay attention to design team attrition / taste)

  • Objective is to make our stores well laid out and easy to navigate, providing a curated “fashion theatre” experience.

  • Active management of store portfolio. Sales / sq. foot is important metric to management and give differentiated space to high value brand, reviewing this constantly. Constantly thinking of in-store experience regarding lighting, mirrors, spacing, etc.

  • The club membership has been covered before. 5% of sales came through online channels with online sales growing at 150% during Q4.

  • Spend per bill up 9% over FY20.

I noticed their new website was identical to Zara’s international website before Zara’s latest update.

Westside
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And here’s the updated Zara one:

Zara
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Zudio

  • Value offerings, completely in-house design.
  • The offerings are constantly refreshed with the aim to provide new and updated merchandise to customers on every visit.

Star

  • Largest stores present in malls.
  • The total comprehensive losses decreased to ₹ 97 Crores in FY21 from ₹166 Crores in FY20 on the back of emphasis on sharp pricing, moderation of marketing and other operating expenses.
  • We now directly engage with over 800 farmers and a majority of vegetables & fruits in our stores are directly sourced and serviced through a network of collection / distribution centres.

Zara / Massimo / Booker

  • During the year under review, the Zara entity recorded revenues of ₹ 1,126 Crores and Loss after Tax of ₹ 41 Crores. The incremental store openings for Zara continues to be calibrated with focus on presence only in very high-quality retail spaces.
  • Required to source merchandise only from the Inditex Group. Also, the choice of product & related specifications are at latter’s discretion.
  • Booker has products in categories across 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.
  • BIL also offers private labels with a quality and affordability proposition, helping improve margins and cash profit for store partners. While these stores are independently run and owned, they carry BIL’s ‘Happy Shopper’ branding. BIL currently serves more than 330 such stores.
  • The sales per square feet improved by over 25% across the portfolio to over ₹ 30,000 during the year(BIL). We believe that the stores have significant head room for growth in the immediate catchments and can be further augmented by a delivery proposition for secondary catchments. BIL plans to replicate its high volume, low cost, asset light model across select geographies.

Haven’t gone through the balance sheet for the year in complete detail, short notes:

  • Biggest expense is on rent.
  • Have around 500Cr. in mutual funds.

Takeaways from ICICI’s research report (Please let me know if paraphrasing breaks forum rules and I will delete.)

  • Zudio stores are ~6000 sq. feet, 66% of products priced less than 500 rupees.
  • Expecting 230 Westside stores and 243 Zudio stores by end of FY23.
  • ICICI estimates topline to be 5200 Cr. by end of FY23 compared to ~2600 Cr. presently.
  • Expecting near term headwinds and have brought down revenue estimates for FY22 to ~4000 Cr.

Disclosure: invested.

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After lot of time, I was looking over strategy of Trent. I noticed a positive surprise that Tata CliQ, launched by Tatas back in somewhere around 2016 or so and owned by Tata Unistore - is a joint venture between Tata Industries and Trent!

Off late Tata CliQ seems to be doing significantly well. I tried to find exact ownership structure but couldn’t so far. At best could find that lion’s share of 90% is held by Tata Industries. It leaves a significant minority 10% stake with Trent in this upcoming Online marketplace. However, there were some rights issues of the parent Tata Unistore in last couple years to which I think only Tata Industries applied…so not sure on final ownership by Trent.

Also, earlier Tata CliQ seemed to sell exclusive Westside merchandise but that also changed eventually and most recently Trent launched Westside.com the sales of which were growing at almost 30% mom recently…

@Chins others who have more knowledge on the ownership structure and roadmap of Tata Unistore/Tata CliQ …do pitch in.

Disc. Invested. Not a buy/sell recommendation. Post for academic purposes to learn more about ecommerce strategy of Trent

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@Investor_No_1,

As you’ve mentioned, Tata Unistore is owned by Trent and Tata Industries. Trent lists the ownership in terms of fair value in the annual reports. Let’s see how the fair value has changed over time:

From AR21:

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From AR19:

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From AR16:

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Tata Unistore itself used to be called Tata Industrial Services, which was in defense/aerospace in the late 2000s.

So a summary of Tata Unistore’s fair value:

Tata Unistore FY21 FY20 FY19 FY18 FY17 FY16
Value in Cr. 201.39 86.98 86.73 58.66 36.03 18.66

This implies a CAGR of 60.93%.

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