Goldman Sachs in a fresh note said the recent fall in shares of Trent Ltd is being attributable to concerns about the impact of the relaunch of the Shein India app by Reliance Retail, but investors might be over-estimating competitive threat and under-appreciating Trent's growth potential. The foreign brokerage retained its 'Buy' call on the stock, saying the online-only is not a scalable model in the India value fashion.
Goldman Sachs said the relaunch of Shein has been allowed by the Indian government on condition that it will source all products only from India, and make sure all consumer data remains in India. A meaningful scale up of a value fast fashion business requires several years of supply chain investments, Goldman Sachs said.
"Reliance Retail will be sourcing only from India for its Shein India app. Our view as highlighted before in our Trent initiation note, is that it takes several years to set up a value fast fashion supply chain before sales can meaningfully scale up," it said.
On Wednesday, Trent shares were up 1.73 per cent at Rs 5,854.25. The scrip fell 6.27 per cent in the previous session. Goldman Sachs said Zudio has potential to gain market share with low competitive risk. At present, Zudio has presence in 180 cities and its 1 per cent overall market share is well spread out across geographies and city tiers.
"Scale up of any new competitor is likely to be gradual and not disruptive. Zudio sharply targets a price point of Rs 999 and below. Apparel market above Rs 999 is not part of Zudio’s TAM. Any online-only apparel retail model will have to operate at higher order values/ ASPs to be able to meaningfully scale," Goldman Sachs said.
The foreign brokerage's interactions with industry participants made it believe that a typical value retail customer has higher propensity of returns when shopping online than an average customer.
"This may lead to higher-than-industry delivery costs in online value apparel delivery. We re-iterate that unit economics of online-only value fashion retail are weak. We continue to believe that online-only value fashion retail does not have healthy unit economics. Average transaction value of a typical value apparel retailer is typically around the Rs 1,000 mark or below and is very sticky at those levels, and typical gross margins are 30-40 per cent, and the delivery costs are typically Rs 120-130 per order irrespective of order value," it said.
It concluded that this leaves an online-only value fashion retailer with Rs 180-280 per order to cover for all other operating costs. Even in a best-case scenario for operating costs, this would lead to poor unit economics, Goldman Sachs said.