Trent share price gets overvalued and oversold; Nifty entry likely

Trent share price has gone parabolic this year, making it one of the best-performing companies in India. The stock has jumped to a record high of ₹6,630, continuing a surge that has been going on in over a decade.

Notably, it has risen in the past 13 consecutive months and more than doubled this year alone. It has soared by over 6,600% since 2013, giving it a market cap of over ₹2.36 trillion or $27.7 billion. 

Potential Nifty 50 inclusion

Trent stock has done well in the past few decades, helped by the popularity of its brands and continued growth of the Indian economy.

Now, with the stock up by more than 100% this year, there are rising optimism that the company will be added to the blue-chip Nifty 50 index.

The Nifty 50 index tracks the biggest companies in India by valuation. As such, the company would fit inside well since its ₹2.36 trillion valuation is bigger than many constituent companies like Bharat Petroleum, Hero Motocorp, Shriram Finance, and Tata Steel.

The inclusion, which is expected to happen later this year, will lead to over $400 million in investment by passive funds that track the index. In most cases, stocks do well, albeit briefly, when they are added to a major index.

Shining star in Tata Group

Trent, the parent company of brands like Westside, Zudio, Misbu, UTSA, and Samoh, has become a shining star of the Tata Group of companies. In this period, it has outperformed all other companies in the conglomerate like Tata Motors, Tata Consultancy, Tata Steel, and Tata Power.

This performance happened because of the company’s popularity among Indians, economic growth, and the rising number of stores. 

From a macro level, the Indian economy has grown by over 7% in the past few years, making it one of the fastest-growing countries in the world. As a result, this growth has led to a big increase in the middle income who have sufficient purchasing power.

Trent has expanded rapidly over the years, bringing the number of stores in the country to over 850, and the management believes that it is still in its early rounds of growth. The hope is to get to over 1,000 stores in the coming years.

This growth has been reflected in the company’s overall financial growth over the years. Its revenue soared from over ₹3,408 crore in 2020 to over ₹12,669 crore (₹126 billion or $1.53 billion).

Its profits after taxes jumped from a ₹51 crore loss in 2021 because of the Covid-19 pandemic to over to over ₹1.029 crore. Its compounded annual growth rate has been over 61% in the past four years, making it one of the fastest-growing companies in the industry.

This profitability growth has led to strong dividend growth in the past few years. In 2023, the company paid a dividend of ₹3.20, a big increase from the previous ₹2.20.

Most of Trent’s businesses are doing well despite some challenges. Its fashion & lifestyle business made ₹15,776 per square feet even as its gross margin fell to 44.4%. Its operating EBITDA rose to 11.74%. The cosmetics business and food businesses did well.

Valuation concerns remain

Still, a key concern among investors is about Trent’s valuation metrics. Ideally, for a fast-growing company, it makes sense to have a premium valuation. Trent’s annual profits in 2023 stood at over ₹1.873 crore or $226 million or ₹18.7 billion. 

This means that the company’s valuation based on its profits is quite high. Data by Value Research shows that the company has a price-to-earnings ratio of 135.72, which is significantly higher than the Nifty 50 index and other retail companies.

For example, Redtape has a P/E ratio of 56 while Siyaram Silk Mills and Felix Global have a multiple of 85. Therefore, an inclusion in the Nifty 50 index will make it the most expensive constituent company. Tata Consumer Products, the most expensive company in the index has a multiple of 104 while Apollo Hospitals, HDFC Life Insurance, and Titan Company have over 88.

Trent share price analysis

Trent chart by TradingView

The weekly chart shows that the Trent stock price has been in a strong bull run for a long time. It has continued to make higher highs and higher lows, making it one of the best-performing companies in the index. The stock has now risen in the past five consecutive weeks.

Trent share price has remained above the 50-week and 100-week Exponential Moving Averages (EMA). The Relative Strength Index (RSI) has remained above the overbought point since June 5th. Also, the Stochastic Oscillator has remained above the overbought level since March.

Therefore, the stock will likely continue rising as buyers target the key resistance at ₹7,000. However, with the stock being highly overbought and overvalued, there are signs that it could retreat in the coming months.