Stock soared 23% since Q3 earnings were announced on 6 February, and trades at 68 times FY21 estimated earnings currently
In general, Trent has done well on executing on its expansion strategy, which is what investors are rewarding it for.
Shares of retailer Trent Ltd touched an all-time high of ₹804.70 earlier this week, though valuations have corrected by about 9% since.
That’s hardly anything to complain about for investors, who are sitting on gains of more than 125% in the past one year.
One factor that has contributed to this is the 23% appreciation in the share price since the company announced its December quarter earnings on 6 February. “Same store sales growth (SSSG) of about 10.5% in the December quarter compared to 5% SSSG in Pantaloons and 2% SSSG in TCNS is extremely positive," said analysts at IDBI Capital Markets and Securities Ltd in a report.
Trent has clocked more than 30% revenue growth in the nine months ended December, with growth in the recent quarter at 32.5%. Trent’s growth rates are clearly impressive, especially in view of the general slowdown in the economy. As such, it is clear why investors are chasing the stock.
For the first nine months of FY20, revenues from Westside retail stores increased by 22% from a year earlier. A ramp-up in revenues of Trent’s value fashion business under the Zudio brand has also contributed to overall revenue growth. Zudio’s revenues grew about 2.6 times to around ₹150 crore in Q3 FY20 and are now contributing 17% to total revenue, according to analysts at ICICI Securities Ltd.
However, investors would do well to keep an eye on margins. For the December quarter, Trent’s gross profit margin declined by 240 basis points year-on-year to 50.6%. A basis point is one-hundredth of a percentage point. Gross margin contraction can be attributed to higher revenues from Zudio, which has lower margins.
“While the Westside format remains a winner in terms of unit store economics, the same for Zudio is yet to be tested in catchments without a corresponding Westside store as currently the former piggybacks on the supply chain of Westside," said analysts at HDFC Securities Institutional Research in a report on 9 February.
In general, Trent has done well on executing on its expansion strategy, which is what investors are rewarding it for. However, the sharp run-up in its shares makes valuations expensive. At present, the stock trades at 68 times estimated earnings for FY21. The only solace is that the same measure for Avenue Supermarts Ltd, India’s biggest listed retailer, stands at 83 times.
Of course, such high valuations are hardly justified. However, as Varun Singh, analyst at IDBI Capital, said, “In the current times, investors are willing to give high valuations for companies where there is greater assurance of profitability and growth, and are likewise staying away from companies where there is uncertainty."