Women’s clothing is an $18-billion opportunity in India. Yet, there are less than half a dozen properly organised womenswear retailers. Trent, a Tata Group company, being the only listed organised player (unlisted players include Fabindia and Biba) in this segment, is not a retail stock. You will not find it in the portfolios of investment legends despite the fact that Trent contains two highly profitable businesses: the women’s clothing retailer Westside, which accounts for almost 80% of the company’s profits and its joint venture (JV) with Spanish retailer Zara, which makes up for the balance 20%.
It is not hard to understand why investors have avoided Trent. Historically, Trent’s consolidated operating performance has been marred by losses in bookstore chain Landmark and the incubation costs of the supermarket JV with British retailer Tesco. These factors led to cumulative Ebitda losses of ₹100 crore in FY15. However, with the winding down of Landmark and the envisaged expansion of the JV with Tesco, Ambit’s retail analyst Abhishek Ranganathan reckons that these losses will lessen by more than 50% to ₹40 crore in FY16.
Under-absorption of the Tesco JV overheads, which is the cause of negative Ebitda, is also set to improve as new stores are added. This venture will add 18 stores in FY16 over a base of 16 in FY15. Consequently, the venture will reach Ebitda break-even in FY18 as store additions gain steam. I will come back to the company’s Tesco venture and lay out its positives and strengths later because it is not exactly central to why I like Trent. my investment hypothesis for buying into the company i