Trent margin beat offsets muted fashion LFL as Zudio expansion continues

Investment View and Key Takeaways

Motilal Oswal Financial Services Limited retains its Buy rating on Trent and raises its FY27E-FY28E standalone EBITDA estimates by 2-4 per cent after stronger-than-expected margin expansion. The broker remains constructive on sustained store expansion, market-share gains in micro-markets, potential margin upside and the scaling of emerging categories.

Valuation remains demanding, with Trent trading at 62x FY28E EPS, while fashion like-for-like growth remains in the low single digits. The revised target price is Rs 3,775.

1QFY27 Financial Performance

Trent's standalone revenue rose 18.5 per cent year-on-year to Rs 56,663 million in 1QFY27, slightly below MOFSL's estimate of Rs 58,331 million. Growth was driven primarily by about 33 per cent year-on-year net retail-area addition. However, revenue per square foot declined about 10 per cent year-on-year as newer stores had lower productivity, while fashion like-for-like growth remained in the low single digits.

Gross margin expanded about 150 basis points year-on-year to 46.6 per cent, around 165 basis points ahead of the broker's estimate. MOFSL attributes the margin strength to favourable format mix and better inventory health. Reported PAT grew despite 39 per cent higher depreciation, 14 per cent higher interest costs and a 26 per cent decline in other income.

Store Expansion and Format Performance

Store additions moderated after the March 2026 surge. Trent added 26 stores in 1QFY27, taking fashion-format stores to 1,312, up 26 per cent year-on-year. Management said annual store additions remain on track, although quarterly additions may be uneven because of property development and regulatory approvals.

More than 80 per cent of new Zudio stores opened in Tier II and Tier III cities and peripheral micro-markets. Management expects these stores to mature over the next two to three years.

Management Commentary and Emerging Categories

Management said consumer sentiment was broadly stable despite geopolitical uncertainty, although discretionary spending remained measured as households prioritised value, quality and convenience. It also flagged emerging raw-material inflation and supply-chain risks, but expects value-chain interventions, wider supplier engagement and calibrated price increases to protect margins.

• Management prioritises comparative micro-market revenue growth, cluster densification, portfolio profitability and return on capital over store-level like-for-like growth.
• Beauty and personal care, innerwear and footwear contributed more than 21 per cent of revenue.
• Westside Online, including Tata Neu, accounted for more than 6 per cent of Westside revenue.
• Investments in AI, automation and technology across merchandising, logistics, warehousing and store operations are expected to improve productivity, cost efficiency and capital allocation over time.

Star Business Update

The Star business recorded a modest improvement, with ex-GST revenue growing 9 per cent year-on-year to Rs 8,900 million, compared with 6 per cent growth in 4QFY26. Star added two net stores, reaching 86 stores across 12 cities.

Annualised revenue per square foot fell about 5 per cent year-on-year to Rs 23,900, while annualised revenue per store declined about 1 per cent to Rs 416 million. Own brands contributed about 74 per cent of Star revenue, up 100 basis points year-on-year, supporting improving store-level economics despite a competitive environment.

Earnings Outlook and Valuation

MOFSL forecasts FY26-FY29E standalone revenue, pre-Ind AS EBITDA and adjusted PAT compound annual growth of about 21 per cent, 26 per cent and 19 per cent, respectively.

The revised target price of Rs 3,775 is based on a sum-of-the-parts valuation as of September 2028. The valuation applies 40x pre-Ind AS EBITDA for Westside and Zudio, 2.5x sales for Trent's 50 per cent stake in the Star joint venture, and 2x EBITDA for Zara.

Key Risks

• Muted fashion like-for-like growth.
• Lower productivity at newer stores.
• Raw-material inflation and supply-chain disruption.
• Intense competition.
• Uneven timing of store openings because of property development and regulatory approvals.
• Elevated depreciation resulting from the growing proportion of new stores.