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

Stock Opportunities
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This is core PF stock in my wife’s pf and take what’s written below with large doses of salt.

I personally think looking at retail companies on quarterly basis is not right metric regardless of whether it is a fantastic quarter or a decent quarter. Variations will happen based on discounting, product assortment and design assortment especially in firms like trent with high variations in seasonal collections at Zudio and Westside.

What I liked about them was continuing to launch new retail concepts but sticking to core philosophy of owning entire brand setup rather than being a big box retailer except at Star. It took Zudio 6 years to be the juggernaut it became and STAR 15 years to find its footing. Retail is a long play and requires tremendous patience and relentless execution.

My idea here would be to add fresh investments once the consolidation takes place between 5000-6000. This is a decadal play and not a quarterly one.

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150

Trent has shown consistent growth both in revenues and operating profits. However this area is getting overcrowded with the push from deep pocket business houses like Reliance retail and Aditya Birla group. Despite the past records favouring Trent, 58 times P/B and >100 Price to Earnings are not justifiable in my opinion. Sitting on the sidelines and may consider either when the Price goes below 4K or the P/B and P/E comes down to acceptable levels.

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What I feel is when valuations do come to below 100, the growth and the prospects would have slowed down so much that you would not want to buy even at that valuation. Precisely what is happening with DMart since past few years.

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Trent was and is definitely over valued if you look with a lens of Q2 earnings. I did cut some and added those stocks where growth is more than Trent, but those are a short term play and done to reduce my portfolio allocation in Trent which crossed 75%. Trent is now a clearcut market leader and is a long term story. Yes valuations are high and has even crossed market cap of H&M which is less than 2 lakh crores. The Global store count of H&M is 4369 and P/B is 5.99 in contrast Trent has less than 1000 stores and P/B is now reduced to below 50 levels. Even smaller Indian retailers are available at premium for example V2 retails is at 100 PE and 15-16 time P/B. Shopper stop is at P/B of approx. 27 Red tape P/B is near 20. Overall fashion retail space is overvalued, so is Trent. My plan is to add more if price goes down to 4000-5000 range even if my allocation goes up.
Disc: Still my largest holding so very biased, bought at very low price. Not a buy/sell recommendation. I am not capable of giving any advice. Views are based on my very limited knowledge. Many a times I was & I can be wrong in all my assessments.

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Thanks for your comments. I would like to mention here, I can be wrong - H&M is H&M while Trent is creator of brands/business models. Comparing companies withing India & even abroad is a good exercise. It gives us a perspective but there may sometimes be more to it. Few days back, I read I think in this same thread that Trent would be next Titan. This was amusing because at that point of time the mcap of Trent was almost equal to Titan. So, it had already become a Titan.

Both Titan & Trent are creators & custodian of multiple brands involving respective area/niche & unique business models so its good to compare the mcap & valuations with a pureplay fashion retailer but with a pinch of salt.

Trent is indeed very highly valued but comparison with H&M may not be the ideal way to look at it after seeing what they can do with brands they create from scratch, the main market where they operate (India) and the immense business leadership, acumen & strategy they get being part of the Tata group in their main market.

Disc: Same as above. Not a buy/sell recommendation. Not eligible for any advice.

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Dear Investor no 1,Thanks for your comment. yes H & M and Trent are different , but you can compare some metrics. Valuation often involves some degree of subjective assessment, especially regarding future prospects. Every investing choice (like most other choices in life) is a leap of faith. We choose something based on present evidence. We review periodically and change if things don’t work out – no harm, no foul. As with life, we live and learn. There is no magic path that we know beforehand will always work. The only comfort is we will know where and how to correct the course if we have a goal and a target. So, I must not be smug about my investment choices and stop assuming they are the best. Trent has a significantly higher P/E ratio, suggesting higher growth expectations from investors. After Q2 result which was below the market expectations, I chose to reduce my allocation and book profit. I did not sell at the peak as the growth was good in Q1, I booked profit after Q2 results as growth reduced compared to valuation. I may be completely wrong cutting my allocation just by looking at Q2 result. Still Trent is the largest holding for me. If in Q3 the growth picks up again, I will keep my allocation as it is and may be add some more, depending on cash availability.

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Thanks @Devsuman for
your words of wisdom. How have you responded with the 40% plus fall in Trent stock price? At back of mind we knew this possibility considering over valuation and also a volatile retail sector. How has the experience been when it became reality and what action/inaction did you take? Would be good to learn from your perspective @hardik_shah1 would be good to know your perspective as well.

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Still Holding. Not sold a single share.

Perspective has not changed.

I had mentioned that I would buy at 5000-6000 on stability. I think it has come. Considering the market situation can go lower, I have not added to my existing position. But will be thinking about it in next few months.

Now coming to the company. I think they are ready to kick STAR into the next level of growth. Competition has increased for all its plays particularly Zudio. So that maybe only thing to monitor.

I again reiterate

Of course in current market conditions, add if ur adventurous. better bargains may be available

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157

Dear @ Investor_No_1,
I sold 75% of my holding after Q2 result because the sales growth declined from 55% to 39% .If you see Q4 results, the sales further declined to 34%. In my opinion during a bull run the valuations for a quality stock is a mix of Fair value+ Speculative value(froth) built on ambitious growth projections by analysts. These are prepared on fancy excel sheets by extrapolating last 6-8 quarters sales growth and profits. When the company fails to deliver as per their expectations the price falls even though there is nothing wrong with the business. In FY 22 & FY23 Trent grew by 73% and 83% respectively. Dec 21 to Jun 24 quarterly sales growth was between 50% to 60% but declined in last two quatres and is below market expectations. That is why the froth is vanishing. There is nothing wrong with the business. Trent is still 25% of my portfolio. I might add more after analyzing Q4 results and valuations. I could not sell at peak prices as its always difficult for me to do that. Selling the same day immediately after the Q2 result was easy based on growth reduction. I was looking for a reason to reduce my allocation from 80% to 25%. If there was no reduction in pace of growth, I might have continued riding on profits. This decision is purely personal. The entry price was miniscule so, it was easy for me. You may take a call based on your entry price and allocation. The frothy valuation was based on extraordinary growth in Zudio stores count, from 94 stores in Q3 FY21 to 635 stores now. In last 12 months they have added 175 new stores. The exceptional growth was due to a low base, I feel that pace of growth in near future may be reduced. It can be in the range of 25% to 30% and it would be a great performance. Trent is not doing quarterly calls so there is no guidance for future stores expansion plans and we can only make assumptions. I expect that Trent may add another 180 to 200 new Zudio stores in next 12 months that is 28% to 30% growth from the current base. Let’s wait for Q4 results.

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Precisely, I was thinking on the same line.
In retail, growth can seem very high if your base is low and you rapidly expands new store.
But within couple of years from the launch, the growth stabilize and it tends to be few single digit point over inflation.

So, for a retail chain store, to have continued high growth rate is dependent on how fast it can open new stores?
But, this is just one part of story.
Often what happens is, with pressure to open new stores and maintain growth, management sometime make mistake in,

  1. Selecting right city
  2. Selecting right locality
  3. Selecting right location
  4. Getting right staff
  5. Opening new store close to existing ones, so sales of older store getting hammered
  6. So on…

I belive only Avenue supermarket (Dmart) is being very cautious regarding this.
They have ample money but they are very prudent while opening new locations.
Despite, pressure from analyst and markets, they are not rushing in to open the store.

Tata, despite having very good management, sometime make grave errors while pursuing growth.
Example - purchase of corus steel during 2008 or purchase of Jaguar car brand

Now, I am not comparing apples with oranges.
I can’t possibly say purchasing a steel plant is similar to opening store.

My point here is sometimes, management makes mistake while chasing growth. So in short run, this fast growth may seem like good strategy but in longer run it can have many problems if not done right.

On the other hand, Westside is getting very good feedback through customer and industry.
I am in same industry (I own a apparel store) and I observed Westside store and their collection for a long time. Finally, after, so many iterations, I think they have found a right mix.

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Trent Growth is declining now. Zudio stores growth also slowed down. Trent is still Market leader but smaller retailers like V2 and Style Bazaar are growing faster than Trent and taking market share. There may be PE re-rating, the declining speed of growth is not as per market expectations. I will be quite cautious and will not add. I am also not selling, will wait for Annual report and management expansion plans for coming years. There is nothing wrong with the company it is a good business which got Great valuation(froth) due to market over expectations over all bullish sentiments. I was lucky to book profit and rebalance to reduce my allocation. I might add when froth is removed and valuations become attractive.
Disclosure: This should not be considered as buy or sell recommendation. I am invested in Trent. My views are biased and my knowledge is limited. I am not an expert nor a SEBI registered advisor. I can be completely wrong in my assessment, I have been wrong many times

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I like your analysis but am curious with such good analysis on Q on Q basis, how were you able to hold on to Trent for decades as it’s growth was much much less precovid when Zudio had not ripened and decade earlier also. I suppose it has always been very high PE even then. Would be good to know what made you held on to the story then?

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Trent maybe a well managed company with a good growth until now but reality will catch up sooner than later. It can’t meet the street expectations with such a high PE and will eventually come down if not, on par with other players in the retail sector. It may be a good candidate for investment when that happens.

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Just for learning purposes, checked PE of below retail companies on screener.
I usually check from Google, but I guess most people use Screener, so checked from it -

Tried to limit this to multi brand retail

Trent: 133 (Google, Economic Times & Money control give a PE of 102 - not sure which one is correct)
DMART: 97
Shoppers Stop: 166
Aditya Birla Fashion: No PE (Probably loss making)
Vishal Mega mart: 107
V2 Retail: 92
Spencer Retail: No PE (Loss making)
Cantabil Retail: 32 (Not sure if this is multi brand retail)

Aditya Vision: 58 (looks like a multibrand but only in Opticals)
Metro Brands: 72 (multibrand only in FootWear)
Bata: 44 (multibrand only in FootWear)

Titan: 85 (self created multibrands in Jewellery, Watched, Optical and also some new element of multibrand retail)

Just a PE comparison gives nothing but as we are discussing valuations, would like to know which company we can compare with a Trent among the list for a like to like comparison of PE? Also, Is there any comparable company that I am missing in the list?
To me, a Dmart and probably Vishal mega mart deserves comparison. Aditya Birla fashion & Shoppers Stop - First one seem to be loss making (as no PE) and Shoppers Stop has been very unpredictable with bottom line (Pls correct me if wrong).

Titan has some elements of multibrand retail although it has its own strengths & risks, but good for some qualitative comparisons.

Does anyone know PE of Reliance Retail from any grey market for unlisted shares? (I am not sure if that is even possible to know).

Disc: Trent, Dmart among top core holdings. Invested in Spencer Retail, Titan as small percentage of portfolio. Transactions in last month. Not a buy/sell recommendation. Not eligible for any advice. Post only for learning purposes. I can be wrong in all my assessments.

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All the stocks you mentioned like Trent, DMart and Titan are good businesses. But the question to ask is can they continue to grow in the same pace as in the past, that justifies a high valuation? What metric to use depends on individuals and can vary from one person to another.

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Pricey physical stores are always the first casualty in a downturn. If and when the markets fall Dmart will still see footfalls, but would you go to Trent unless its December time 50% off sale?

A stock with a PE of 100 is bound to fall and if not go sideways for a long long time. See Asian Paints or Kotak Bank as an example.

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No, IMO all are not good businesses (The three you mentioned are good though). Most near sighted investors would not have rated Trent or even looked at it as a good business 5-10 years back.

Agree on this. But could we have guessed it right for Zudio 2-3 years back?

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Pls look at Zudio business model and pricing. Zudio is biggest contributor of top & bottom line currently. Most shoppers in India do not need 50% discount and wait till december to shop at Zudio price point.

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Thanks for reading and commenting, Short answer I was too lucky. Long one now- I mentioned earlier, I was a share holder of Lakme and received a lumpsum from the Lakme brand sales proceeds to HUL. When Trent was formed, I received the shares equivalent to my holdings in Lakme. Mrs. Tata (Noel’s mother) explained to share holders that Trent is a niche business now but will flourish in India in next 15-20 years. I kept the shares since they were almost free. I was too busy in my corporate job and it was a blessing in disguise. First 15 years was sheer luck and a forced patience. I never touched my stocks like Titan, Ranbaxy(now Sun),Trent, Tata, L&T,ITC etc. It was during COVID I wanted to have enough cash for any eventuality that I seriously analyzed my portfolio to create a cash position and thereafter started tracking. Please see below table of valuation which helped me decide to start selling to book profit and cut my allocation.

Median Median Valuations Valuation Today
Since 2006 Last 10 Years When I Started cutting 7th April
PE 150 164.7 234 111
P/B 4.7 9.4 68.5 35.4
MktCap/sales 3.4 6.5 21 10.2
EV/EBIDTA 52.3 51.6 113 56.8
  • For a fast-fashion retailer like Trent, EV/EBITDA is generally the most comprehensive and relevant metric as it incorporates debt/leases and focuses on operational profitability. Market Cap/Sales (P/S) is also very important for evaluating growth momentum. P/E is useful but needs context due to potential earnings volatility and exclusion of debt. P/B is typically the least relevant for this type of business.Ultimately, use a combination of these metrics, alongside industry comparisons and qualitative factors (management quality, brand strength, growth strategy, competitive landscape), to assess valuation. Every investing choice (like most other choices in life) is a leap of faith. We choose something based on present evidence. We review periodically and change if things don’t work out – no harm, no foul. As with life, we live and learn. I must not be smug about my investment choices and stop assuming they are the best.
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Thanks a lot for sharing this story. A lot to learn from such intangibles both in life & in investing. Thanks again :folded_hands:

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