Jefferies initiates hold coverage on Trent (Tata Group Company) with a target of Rs 650

Covid crisis is a headwind for Trent. over the medium term in FY21, Jefferies expect more of the same from Westside while focus on the value segment would rise under Zudio. Although it is a strong thematic play, Jefferies initiates at Hold coverage, after a sharp share price rally from lows and uncertainty on footfalls. The company is closely trading at a market cap of Rs 24,500 cr. Jefferies says the upside scenario for Trent from current market price is Rs 890 (30% upside) while downside risk is Rs 450 (34%).

The opportunity: 

With a contribution of 8% to the overall retail market, apparel and accessories market is estimated at U.S. $60bn in size, the company has steadily formalized with a third of the market now organised.

Westside (WS) holds the key:

Trent has a strong presence in apparels with Westside format, the key revenue and earnings contributor. Westside also ranks better than most peers on various parameters such as revenue per square feet, gross margin and operating margins.

Zudio value:

In the value segment, Zudio format has seen strong additions in the recent past to 80 stores by Mar-20. Attractive price points ensure higher per square feet throughputs and Jefferies expect Zudio to be a strong growth driver going ahead.

Covid issue: 

FY21 would be a washout year and Jefferies forecast over 40% YoY decline in standalone revenue for the company. However, they believe in a strong recovery, driving 18% standalone revenue CAGR over FY20-23. FY21 would also be a significant loss in the standalone entity, a first in at least 15 years but three-year EBITDA CAGR should be 20%.

Medium-term story: 

Jefferies sees huge growth potential for both the formats. Despite a respectable 14% CAGR in addition to 165 stores, Westside has lagged peers. The headroom is significant in the context of its presence in 87 cities, compared with Reliance Trends which is present in 400+. Zudio also has a strong growth runway.

Key partnerships:

Zara is a Joint Venture with Inditex Group, where Trent has a 49% stake. While the format is popular, Trent considers this as a financial investment, as Inditex Group has the control. Star Bazaar is a JV with Tesco Plc, which has 50 supermarket stores. The business is still loss-making given sub-scale operations.

Conololidaed financials:

At the consolidated level, Jefferis forecast greater than 20% revenue & EBITDA CAGR over FY20-23. EPS should rise at 18% CAGR. After the capital raise on Aug 19, Trent is currently in net cash position. Continued investments and Covid challenges imply negative FCF in the medium term and plans are to raise funds through a right issue in the near term.

Key risks:

A sharp recovery in the footfalls and gains from the unorganised markets are key upside risks while continued Covid related pressures and rise in online competition are key downside risks.

(Authored by Rahul Kamdar)