The Tata group-owned fashion retailer Trent is now the hottest retail stock on the bourses, ahead of Avenue Supermarts (DMart), which was the most-loved stock in the segment for more than five years since its initial public offering (IPO) in March 2017. That’s also because Avenue Supermarts’ stock price and valuation have been under pressure in the last one year, while Trent has seen a valuation re-rating led by a big rally in its stock price.
Trent is now trading at a price-to-book value (P/B) of 29 times (x), nearly double that of Avenue Supermarts’ P/B ratio of 15.1x. The ratio is based on the two companies’ market capitalisation on Wednesday and their balance sheet at the end of March this year. Similarly, at its current share price, Trent is valued at a trailing price-to-earnings multiple of 150x, nearly 50 per cent higher than Avenue Supermarts' 101x. The earnings multiple is based on the two companies’ trailing 12-month net profits ended June this year.
Trent’s P/B ratio surpassed Avenue Supermarts’ for the first time in March last year, but the gap has steadily widened in the last one year as Trent has continued to grow faster, pulling in new equity investors for its shares listed on the bourses.
Trent’s share price and market capitalisation are up 46.3 per cent in the last one year, from Rs 50,000 crore at the end of August last year to Rs 73,186 crore on Wednesday. In comparison, Avenue Supermarts has lost 17 per cent of its market value, and its market capitalisation declined to Rs 2.43 trillion on Wednesday from Rs 2.94 trillion at the end of August last year.
As a result, Trent has narrowed the gap in market capitalisation with Avenue Supermarts, but the latter remains ahead in terms
of revenues and profits by a big margin.
For example, Avenue Supermarts reported consolidated net sales of Rs 42,840 crore in FY23, over 5x that of Trent's annual net sales of Rs 8,242 crore last financial year. Similarly, Avenue Supermarts' FY23 net profit of Rs 2,373 crore was nearly seven times that of Trent’s net profit of Rs 347 crore last financial year.
A key reason the markets have rewarded Trent is that its revenues and profits are growing at a much faster pace than those of Avenue Supermarts. In FY23, Trent’s net sales were up 83 per cent year-on-year, while Avenue Supermarts reported 38 per cent YoY growth in net sales last financial year. Similarly, Trent’s net profit more than tripled last financial year, compared to 59 per cent YoY growth reported by Avenue Supermarts. Trent also beats Avenue Supermarts in three-year compounded annual growth rate (CAGR) in revenues and earnings.
This may have led to a few institutional and high networth investors cutting down their exposure to DMart, and some of this money moved to Trent, supporting a rally in its stock price.
Trent gets most of its revenues from Westside and Zudio chain of fashion and lifestyle stores. The company is present in groceries through the Star Market chain of hypermarkets, but it is still a small part of its overall business. In contrast, Avenue Supermarts operates the DMart chain of supermarkets, and most of its revenues come from grocery sales.
Analysts attribute Trent's outperformance to the success of its Zudio franchise, which has emerged as one of the biggest 'value for money' fashion formats in the country. "Aggressive franchising of Zudio may drive improvement in return ratios," say analysts at ICICI Securities in their latest report on Trent.
Avenue Supermarts, on the other hand, is suffering from a slowdown in discretionary consumer demand and margin contraction in its core grocery retailing business. "Avenue Supermarts' Q1FY24 revenue was up 18 per cent YoY, but gross margins contracted by 120 basis points YoY, resulting in a 130bp contraction in operating profit margins," write analysts at Motilal Oswal Financial Services.
However, despite its recent success, Trent's earnings growth remains volatile, while Avenue Supermarts' finances are far steadier.