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Trent Ltd>
  • CMP : 5,245.6 Chg : 221.70 (4.41%)
  • Target : 1,730.0 (29.10%)
  • Target Period : 12-18 Month

09 Feb 2023

Zudio: Game changer for Trent!

About The Stock

Trent is India’s leading retailer with a presence across various consumer categories (600+ stores). Inherent strength of brands (Westside, Zudio, Star, Zara) and accelerated store additions has led Trent to be among the fastest growing companies in our retail coverage universe.

  • ‘Westside’ (70% of revenues) has proven to be one of the most profitable business models as it primarily focuses on selling private label brands (EBITDA margin: 11%, consistent SSSG: 10%+)
  • ‘Zudio’ (30% of sales), the value fashion brand, continues to be the next leg of growth for Trent (revenue CAGR: 72% FY19-22)
Q3FY23 Results:

Trent reported superlative sales number with growth beating our/consensus estimates. Acceptance of Zudio as a value fashion brand has been a game changer for Trent leading to fastest growing apparel company in India.

  • On a slightly favourable base, revenue grew 61% YoY to ₹ 2171 crore. On a three-year CAGR basis, revenue growth was at an impressive 36%, which is the highest among other lifestyle retailers
  • Gross margins for the quarter declined 590 bps YoY to 45.4% (I-direct estimate: 49%) possibly on account of a sharp rise in share of Zudio format (yields lower gross margins but has superior asset turn)
  • Higher opex cost on account of new store openings resulted in EBITDA margins declining 620 bps YoY to 15.5%. Despite lower than anticipated margins, absolute EBITDA was at ₹ 336 crore (I-direct estimate: ₹ 337 crore) with three-year CAGR of 25%
What should Investors do?

Trent has been an exceptional performer with stock price appreciating at ~33% CAGR in the last five years.

  • Robust performance during challenging times and industry leading growth will continue to warrant premium valuations for Trent. Hence, we maintain our BUY rating on the stock
Target Price and Valuation

We value Trent at ₹ 1730 based on SOTP valuation.

Key Triggers for future price performance
  • We pencil in 250 store additions between Westside and Zudio for FY23-24E
  • Liquidity position remains strong with cash & investments worth ₹ 350+ crore that will enable it to tide over the current situation better than peers
  • Zudio continues to be the growth engine for Trent. We expect revenues to grow at 59% CAGR in FY20-24E
  • In the long run, the company aims to grow its revenue at 25%+ CAGR
Alternate Stock Idea:

Apart from Trent, we also like Aditya Birla Fashion & Retail.

  • ABFRL has charted out growth strategies to become a ~US$2.8 billion entity (₹ 21000 crore) by FY26E, translating to 15% CAGR in FY20-26E
  • BUY with a target price of ₹ 340/share

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 year CAGR (FY17-22) FY23E FY24E 2 year CAGR (FY22-24E)
Net Sales 2,630.2 3,486.0 2,593.0 4,498.0 20.0 8,130.9 9,526.4 45.5
EBITDA 227.7 544.0 171.9 573.9 - 1,152.1 1,460.4 59.5
PAT 97.0 122.8 -146.2 105.8 13.0 500.4 676.5 -
EV/Sales (x) 17.1 13.5 18.2 10.6 - 5.8 4.9 -
EV/EBITDA (x) 197.5 86.6 274.5 82.8 - 41.2 32.2 -
RoCE (%) 10.1 15.9 4.3 14.1 - 29.0 32.7 -
RoE (%) 5.9 5.1 -6.3 4.5 - 18.3 20.8 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter

  • Trent’s Q3FY23 revenue print is a strong beat on our estimates. On a slightly favourable base, revenue grew 61% YoY to | 2171 crore (I-direct estimate: | 1886.9 crore). On a three-year CAGR basis, revenue growth was at an impressive 36%, the highest among lifestyle retailers. On the store addition front, the company has been aggressive on the Zudio format with the opening of 91 stores in YTDFY23 taking the total store count to 326. For Westside, the company added 11 new stores taking the total store count to 211. The Westside format has been performing well with SSSG of 17% in Q3FY23. Also, revenue/sq ft for Westside appears to be significantly higher at ~| 14000 (annualised), which is higher than average run-rate of ~| 10500. Back of the envelope calculation suggests the Zudio format has grown ~2.5x with share in revenue increasing significantly from ~30% to 40%+ (share of Zudio format in FY20 was at ~16%). Emerging categories like beauty and personal care, innerwear and home witnessed healthy traction and now contributes ~15% to sales
  • Inflationary stress has been more acute at the lower end of the fashion value chain (ASPs < | 1000) as demand remains weak. However, Zudio (value fashion player) continues to defy all odds with sustained robust growth. It has been the new growth engine for Trent given its scalable business model (one-third size of Westside format) and strong acceptance in Tier II/III cities with sharp price point assortment (ASP < | 500). Zudio stores have multiplied ~8x in the last three years with overall outlets at 326
  • Gross margins for the quarter declined 590 bps YoY to 45.4% (I-direct estimate: 49%) possibly on account of a sharp rise in share of Zudio format (yields lower gross margins but has superior asset turn). Higher opex cost on account of new store openings resulted in EBITDA margins declining 620 bps YoY to 15.5% (I-direct estimate: 17.9%). The previous quarter also had one-off benefits of rent waivers and reversals relating to inventory provisioning. Despite lower than anticipated margins, absolute EBITDA was at | 336 crore (I-direct estimate: | 337 crore) with three-year CAGR of 25%. A key aspect to highlight would be share of JV and associates (Star Bazar & Zara) reporting a remarkable turnaround with profit of | 76.8 crore in 9MFY23 vs. | 14.8 crore in 9MFY22. While Zara continues to be the most profitable brand, a material improvement in profitability for Star Bazar may have contributed to higher profits

Trent has, over the years, consistently outperformed peers given the strong brand patronage (Westside, Zudio, Star, Zara) and proven business model (Westside: 100% private label). Healthy beat on the topline front, warrants upward revision to our revenue estimates for FY23-24E. We expect Westside and Zudio formats to report revenue CAGR of 29% and 59%, respectively, in FY20-24E. We expect the growth trajectory to marginally moderate on a very strong base with Zudio gaining substantial scale. Share of the Zudio format in standalone revenues is expected to increase to 37% by FY24E. Furthermore, a sharp increase in profits in share of associates (Zara and Star Bazar) during 9MFY23 is a key positive and signals emphasis on cost cutting measures and its journey towards improving profitability of the ‘Star’ format. We build in revenue, EBITDA CAGR of 29% and 28%, respectively, in FY20-24E. Industry leading performance and consistent revenue growth to support premium valuations. We recommend BUY and maintain our target price of | 1730



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