Shares of Trent Ltd hit a 52-week high of Rs 1,522.50 on the NSE last week. The stock closed 8% lower than this level on Friday, but investors have been sitting on great gains over time. The stock has gained 55% in the last year against a gain of 8% in the Nifty 500 index. However, this also means that the valuation of the company is high. As a result, some analysts have a ‘sell’ rating on the stock, even though they continue to maintain Trent’s growth story.
On a three-year compound annual growth rate (CAGR) basis, Trent’s June quarter (Q1FY23) revenue growth was 29%, well ahead of its peers. The same measure for TCNS Clothing Co Ltd was flat in Q1 and 4% for Shoppers Stop Ltd.
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That said, Trent’s share price is likely to maintain momentum, provided it maintains such growth rates. However, “Q1FY23 was a play on a complete opening up of the economy for all apparel retailers, and this growth cannot be extrapolated to the upcoming quarters. According to Jay Gandhi, an analyst at HDFC Securities, there could be some generalisation.
Trent offers products at a variety of price points, and this is a favorable factor, as it helps it cater to a larger set of consumers. Zudio, which operates in the lower price point range, is seeing a massive store expansion. As of the end of fiscal year 2012, the number of Zoodio stores was 233, ahead of Westside’s count of 200 stores.
In all, Trent has added 15 fashion stores in Q1FY23, taking the total to 450. However, increasing the stores will impact margins. In Q1, Trent’s gross margin stood at 49.3%, which was 370 basis points lower than pre-Covid levels (Q1FY20). One basis point is 0.01%. Analysts say the sharp growth in Zudio could weigh on the overall margin performance of the last quarter.
“At the price point at which Judio operates, demand is higher, which means more customers versus Westside. Therefore, operating leverage benefits. It remains to be seen how Zudio’s store additions unfold for the Trent. But given the better inventory turnover, the total return on equity of the company should not be reduced,” said Varun Singh, an analyst at IDBI Capital Markets and Securities Ltd.
If the store expansion doesn’t translate into substantial revenue growth, investor sentiment will be dampened. In addition, inflationary trends need to be closely monitored as it influences the spending decisions of consumers.
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