Trent posted a 7% YoY revenue increase (7% beat), supported by easing restrictions and improving customer traction over Jan–Feb’21. EBITDA grew 47% YoY on a lower base, aided by high gross margins. The gradual recovery seen after nine months of lockdown has once again been derailed due to the second COVID wave. Thus, Motilal Oswal revises down their FY22E revenue/EBITDA estimate by 26%/44%, but largely maintains FY23 estimates – factoring in recovery, coupled with the ongoing steady pace of store adds. Nonetheless, rich valuations leave a limited upside. Maintain Neutral rating on Trent, says Motilal Oswal.

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Trent's superior liquidity profile, net cash position, and aggressive store adds should enable growth at a healthy pace once the market recovers. Furthermore, Zudio has recovered faster as it caters to the Value Retail segment in lower tier cities. Motilal Oswal significantly cut their FY22 revenue/EBITDA estimate by 26%/44% in FY22E (given the lockdown due to the second COVID wave), but largely maintain our FY23 estimates – factoring in revenue/EBITDA growth of 64%/62% over its FY20 performance (revenue/EBITDA CAGR of 18%/17% over FY20–23E) on the back of aggressively strong adds, stellar growth in Zudio, and a stable performance in Westside.

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Motilal Oswal says it arrived at an SOTP-based target price of Rs 710 on Trent, valuing the standalone biz (including Zudio) at 25x EV/EBITDA, Zara at 10x EBITDA, and Star at 1x EV/sales on FY23E. Trent’s superior execution and healthy balance sheet warrant premium valuations, but it already trades at rich valuations of 34x EV/EBITDA on FY23E, leaving a limited upside for the stock. Thus, Motilal remains Neutral on the stock.

Management commentary on outlook of the Business:

Motilal Oswal says a sharp drop is seen in revenues following temporary partial lockdowns in various states, along with local restrictions on operating hours / days from mid-March (due to the second COVID wave). Trent continues to engage with property partners to cushion the impact of the recent business disruption in several states. WestStyleClub – The loyalty program with 6m members saw the highest ever paid enrolments, aiding growth in bill values. The online channel registered 150%+ growth in 4QFY21; 5% of Westside’s total revenues during the quarter came from the online channel.