Trent added to the Marcellus’ Consistent Compounders Portfolio

Marcellus’ Consistent Compounders Portfolio companies reported, on a weighted average basis, 20% YoY growth in profit after tax for both 1QFY24 (over 1QFY23) as well as for FY23 (over FY22). Financials sector companies in CCP (three lenders and 2 insurance companies) reported healthy topline as well as bottomline growth, reflective of market share gains. The only weakness amongst CCP lenders’ 1QFY24 results was HDFC Bank’s muted deposit growth, which we believe was a temporary blip that should normalise in the coming quarters. Profits for paints and adhesives companies were supported in 1Q by gross margin expansion as raw material costs eased YoY. Two companies in our portfolio – Divis Labs and Page Industries – continued to report declines in their profits. Page Industries’ profits were adversely affected by two temporary factors in the recent past – de-stocking of inventory in the distribution channel due to the implementation of tech initiatives like auto-replenishment system (ARS), and high base of athleisure revenues as households transitioned away from WFH over the last 18 months. For Divis Labs, the profit decline was due to the presence of Covid related drug Molnupiravir in its base quarter (1QFY23), which is starting to get offset by new revenue growth drivers such as nutraceuticals and contrast media products.

In August 2023, Marcellus made one change to the list of stocks in Marcellus’ CCP Portfolio with the addition of Trent Ltd. Trent is a retail business with successful formats like Westside and Zudio, and a JV with Zara (49% owned by Trent). The competitive advantages of Trent lie in its end-to-end control of supply chain (back-end – direct from manufacturer to stores) and product development – which translates into greater value-for-money proposition for customers, relevant of the merchandise and hence inventory turns (6x) which are the best in the industry. Once these strengths were developed for Westside, formats like Zudio have subsequently been built on the same tenets through usage of common vendors, warehousing, and logistics at the back end and common store opening teams at the front-end. Capital efficiency is maintained despite rapid scalability of Zudio due to its unique store expansion business model of running the store as COCO (company owned, company operated) in the first year and then transitioning to FOCO (franchisee owned, company operated) from the second year onwards.

The company also has an incubation in the Food & Grocery retail space called Star Bazaar. Star was started more than a decade back and in 2014 the company converted it into a JV with Tesco UK. Today the JV has 63 stores under operations primarily in West & South India. Near term earnings growth prospect for Trent will be linked to Westside (more of the same), Zudio (propelled by store network expansion) and Star Bazaar (profitability turnaround and store network expansion). However, Trent continues to incubate newer retail formats, some of which could become as successful as Zudio in future. Four new formats are already under incubation viz. Misbu (cosmetics), Utsa (ethnic wear), Samoh (Occasion wear), & JV with MAS brands for athleisure & innerwear. Scalability of Trent’s business across as well as within retail formats is supported by the depth and width in its management talent – expats hired from reputed foreign retailers like M&S, Woolworths etc and several layers of internally groomed talent, including those recruited from TAS (Tata Administrative Service). Whilst at first glance, Trent’s P/E multiple looks rich, there are three factors which have to be incorporated while considering its valuations – a) INDAS 116 impact (accelerated store count expansion of any retailer leads to P&L reflecting up-fronted costs of rentals – non-cash item); b) drop in losses and potential turnaround of Star Bazaar format at a store level; and c) the impact of rapid growth of Zudio on Trent’s forward P/E multiple in the near future.

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