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Motilal Oswal
Trent (Buy)
CMP: ₹506.55
Target: ₹605
Trent Limited is engaged in the retail sale of readymade garments. The company’s segments include retailing and others. It primarily operates stores across three formats: Westside, Star and Landmark. Westside offers apparel, footwear and accessories for men, women and children, along with furnishings, decor and a range of home accessories.
We visited two Zudio stores — Trent’s recently started value fashion format — to explore its offerings. Key insights highlighted below:
We came back enthused with Zudio’s value proposition — it targets the youth with stylish interiors, good fashionable/fast churning product inventory, sharp pricing and high focus on throughputs — which we believe would help in garnering healthy store revenue and profitability.
Zudio’s capex light FOCO (franchisee owned company operated) model allows Trent to retain operations and garner very high ROCE (return on capital employed) given the latter’s limited investment in only inventory, which has nearly 10-12x turns. The franchisee on the other hand spends on store capex and retains about 12-15 per cent IRR.
The FOCO model should allow Zudio to accelerate its pace of store addition. Of the targeted 100 store adds in FY20, 60 stores are already in place.
While Trent is richly valued, we believe that Zudio’s high growth and profitability potential can help sustain these valuations. Maintain Buy with target price of ₹605.
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