High growth and margin expectations likely to drive Trent's stock

Tata group company Trent had a strong Q4FY24, delivering 53 per cent year –on-year (Y-o-Y) revenue growth (standalone) and 125 per cent Y-o-Y operating profit growth in Q4FY24. Gross margin expanded 449 basis points (bps) Y-o-Y, driving the beat of consensus. There was an acceleration of Zudio store additions, as well as outperformance versus its peers. The margin expansion was backed by better return on invested capital (RoIC).

Sequentially, gross margin contracted by 66 bps compared to Q3FY24. The company added five Westside stores and 85 Zudio stores, with a footprint across 91 cities (Westside) and 169 cities (Zudio). Trent has added 193 stores in Zudio format in FY24 which is in-line with management guidance at the start of fiscal FY24.

Like-for-like growth has averaged 10 per cent in fashion (Westside + Zudio) despite the challenging consumption environment. Despite growth being driven by the lower-margin Zudio, operating profit margin was 11.7 per cent in FY24, an expansion of 290 bps Y-o-Y. The adjusted net profit grew 129 per cent but Trent recognized exceptional income of Rs 540 crore in Q4 due to reassessment of lease liabilities and ROU (right of use) assets.

Strong RoIC growth

The post-tax RoIC has increased from 21 per cent in FY23 to 37 per cent in FY24, due to better margin, better fixed asset turns and lower inventory. Most analysts will upgrade operating profit expectations for FY25-26. Trent has higher growth in the apparel segment versus peers while the Zudio expansion continues and higher sales per square feet for Zudio could lead to further upgrades.

The consolidated revenue grew 51 per cent Y-o-Y to Rs 3,300 crore. The growth was led by Zudio, which nearly doubled revenues on the back of a 50 per cent increase in store count. This was similar to standalone top-line growth of 53 per cent. The consolidated gross margin was stable at 44 per cent despite weak seasonality. But employee costs saw a 90 per cent increase Y-o-Y. Consolidated operating profit grew 31 per cent Y-o-Y to Rs 470 crore, which was ahead of consensus, while standalone operating profit more than doubled.

Sharp decline in interest costs (lease-related) and higher income from associates (including Zara) helped growth in net profit, which was ahead of estimates. Reported subsidiaries (Booker cash & carry, StarQuick online and a few Star Bazaars) saw a modest 5 per cent revenue growth, with a loss at the operating level.

Revenue & profit

For FY24, consolidated revenues grew 50 per cent Y-o-Y to Rs 12,370 crore, with operating profit growth even better at 80 per cent to Rs 1,920 crore. Standalone FY24 revenues grew 55 per cent to Rs 11,920 crore, with operating profit growing 72 per cent Y-o-Y to Rs 1,930 crore.

The share price has risen 2.5 per cent on the results and most analysts have positive recommendations with projections of high growth and strong margins. However, valuations are also high which means at least some of the higher growth projections are priced in. At some stage, as the market becomes more sophisticated, like other fashion-driven businesses, Trent may also have to face questions about ESG norms, and the sustainability of its raw material sourcing. Investors should be braced for that.