World's largest clothing retailer, Inditex has revealed that its Indian partner, Trent has the option to sell its entire stake in their two joint ventures that operate Zara and Massimo Dutti stores in India.
According to Inditex's latest annual report, the Spanish company also holds an option to buy Trent's 35 per cent stake in the Zara business and 49 per cent stake in the Massimo Dutti business in India. The price for these potential transactions will be based on the value of Trent's share of the businesses at the time Inditex chooses to exercise its option. However, the report did not specify a timeframe for these actions.
Currently, the fast-fashion retailer operates 23 Zara stores and three Massimo Dutti stores in India through these JVs. Inditex has also recently established its own fully-owned companies in India, specifically Bershka Retail and Zara Home.
With a growing number of young people adopting Western-style clothing, India's large population makes it an attractive market for apparel brands. In the existing joint ventures, Inditex handles most of the product sourcing and merchandise, while Trent focuses on finding suitable real estate and store locations.
The agreement between Inditex and Trent requires the joint venture companies to source all their merchandise exclusively from the Inditex Group. Inditex also controls the product selection and specifications. Trent has consistently described its involvement in these ventures as a financial investment.
Earlier this year, Trent sold approximately 29 per cent of its stake in the Massimo Dutti JV for around $2.5 million. Last year, Trent sold about 14 per cent of its stake in the Zara joint venture for roughly $12.6 million.
A recent research by Macquarie Equity Research notes, since Inditex makes all operating decisions for this JV, its ability to determine pricing is higher and hence we conservatively do not factor in any value from this stake when determining our target price.
Zara entered the Indian market in 2010 and became profitable the following year, achieving profitability faster than many other fashion brands in India. However, its growth rate has slowed in recent years, while competitor H&M has become India's largest clothing brand by revenue, driven by aggressive store expansion and lower prices.
