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Resilient business model to enable sharp recovery…

About the stock: Trent is India’s leading retailer with a presence across various consumer categories (400+ 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’ (75% 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: 8-9%)

* ‘Zudio’ (22% of sales), the value fashion brand, continues to be the next leg of growth for Trent (revenue CAGR: 50% FY18-21)

Key AGM highlights: We attended Trent’s annual general meeting for FY20-21.

* Post lockdown relaxations, revenue recovery has been encouraging with July sales tracking significantly higher YoY. Currently 90%+ stores have resumed their operations

* In the long run, the company aims to grow its revenue at CAGR of 25%+

* Affirmed its aggressive store opening plans for its fashion format (Westside: 35 & Zudio: 75) in FY22 (outlined capex worth | 200 crore in FY22E)

* Targeting online sales to reach 10% vs. current 5% over the next few years

* Despite pandemic challenges, Zudio exited FY21 with EBIT of | 5 crore (vs. | 8 crore in FY20). Zudio reported highest ever EBIT margins of 6% in H2FY21

* Westside reported sales decline of 43% YoY in FY21 with EBIT loss of | 27 crore. Witnessed strong recovery in H2FY21 with EBIT margin of 9%

* Star Bazaar (grocery format) has progressed well in FY21 with the company gaining market share in the region in which it operates. StarQuik (online channel) performed exceptionally well with sales growing 124% YoY to | 78 crore with average order value increasing 33% YoY to | 1356

* Minimised discounting with lower EOSS days in FY21 (gross margin for Zudio, Westside improved 100 bps, 150 bps YoY to 40%, 58%, respectively

What should investors do?

Trent has been an exceptional performer with the stock price appreciating at ~36% CAGR in the last five years.

* We continue to remain structurally positive and maintain BUY rating

Target Price and Valuation: We value Trent at | 1060 based on SOTP valuation

Key triggers for future price performance:

* We pencil in 175 store additions between Westside and Zudio for FY22-23E

* Liquidity position remains robust with cash & investments worth | 752 crore that will enable it to tide over the current situation better than peers

* Expect revenue recovery to pick up pace from H2FY22 onwards and model in revenue and earnings CAGR of 17% and 37%, respectively, in FY20-23E

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