Buy Trent Ltd For Target Rs.1,230 - ICICI Securities
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Faster-than-expected recovery
Trent’s Q2FY22 standalone revenues increased 1.25x YoY (~25% higher than precovid sales in Q2FY20) with EBITDA (post Ind-AS 116) of Rs2.2bn – both above our / consensus estimates. Store addition momentum continued with seven Westside and 10 Zudio stores being added on a QoQ basis. Online channel registered 95% QoQ growth in Q2FY22. EBIT (pre Ind-AS 116) stood at Rs1.4bn against an EBIT loss of Rs590mn in Q2FY21. As highlighted in our recent note, Margins to surprise as demand bounces back, we believe earnings of apparel brands and retail companies may surprise positively led by faster-than-expected demand recovery and expect consensus to turn more constructive with Q2FY22 management commentary. Factoring-in faster-than-expected demand recovery, we increase our FY23E-FY24E EBITDA/PAT by 4-5%. Maintain BUY with a revised DCF-based target price of Rs1,230/sh (earlier: Rs1,160) on better margin / cash generation. Key risks: extended lockdowns, and lower discretionary spends.
* Standalone revenues were up 1.25x YoY to Rs10.2bn (~25% higher that precovid sales in Q2FY20). In Q2FY22, the fashion business (Westside and Zudio) operated for 91% of the trading days, up from 46% in Q1FY22. The latter part of Q2FY22 saw significant easing of pandemic-related restrictions. The online channel registered over 95% QoQ growth in Q2FY22.
* Accelerated store expansion plans: Company added seven Westside stores taking the total to 191, and 10 Zudio stores taking the total to 147, in Q2FY22. Trent usually targets to add 100 fashion stores every year.
* Reported gross margin improved sharply by 1,123bps YoY to 52.1% (up 428bps from the pre-covid margins in Q2FY20), mainly led by inventory reductions (lower fresh purchases). Company recognised Rs118.2mn relating to waiver / rent reductions in Q2FY22 vs Rs186.5mn in Q2FY21. EBITDA margin (post Ind-AS 116) stood at 21.7%, higher than pre-covid levels of 16.2% in Q2FY20. EBIT (post IndAS 116) stood at Rs1.5bn vs EBIT loss of Rs514mn YoY. Trent recorded an exceptional item to the tune of Rs130mn relating to impairment of investment in Commonwealth Developers Limited. Recurring PAT (post Ind-AS 116) stood at Rs1.4bn in Q2FY22 against a loss of Rs481mn in Q2FY21. The net effect of Ind-AS 116 on standalone PBT was an adverse impact of Rs190mn in Q2FY22 and Rs430mn in H1FY22.
* Operating cash outflow post working capital requirement of Rs2.3bn stood at Rs1.4bn in H1FY22 against an outflow of Rs400mn in H1FY21. Company incurred capex of Rs448mn in H1FY22. During the year, the company has issued 5,000 NCDs of Rs1mn each, which carry an interest of 5.78% p.a. redeemable on 29th May’26.
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