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Magnificent execution leads to pre-festive bonanza

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)

Q2FY22 Results: Trent delivered a blockbuster quarterly performance with significant beat on our/consensus estimates across all fronts. While revenue recovery rate was expected to reach close to pre-Covid levels, Trent reported its highest ever quarterly revenue in Q2FY22, followed by robust EBITDA margins.

* On a favourable base, revenue grew 126% YoY to | 1020.4 crore (two-year CAGR: 12%).

* Reported robust EBITDA margins of 21.7% (Q2FY21: 1.4%, Q2FY20: 16.2%)

* On account of robust operational performance, PAT came in at | 125.6 crore (Q2FY20: | 38.3 crore, Q2FY21: (-) | 48.1 crore).

What should investors do? Trent has been an exceptional performer with stock price appreciating at ~39% CAGR in the last five years.

* Robust performance during challenging times and industry leading performance will continue to warrant premium valuations to Trent. Hence, we maintain our BUY rating on the stock

Target Price and Valuation: We value Trent at | 1330 based on SOTP valuation

Key triggers for future price performance:

* We pencil in 230 store additions between Westside and Zudio for FY22-24E

* Liquidity position remains robust with cash & investments worth | 685 crore that will enable it to tide over the current situation better than peers

* Due to healthy beat on estimates, we revise our revenue and earnings estimates upwards for FY22/23E. We roll over our estimates to FY24E and build in revenue, earnings CAGR of 18%, 42%, respectively, in FY20-24E

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

Alternate Stock Idea: Apart from Trent, we also like TCNS Clothing.

* TCNS has emerged as the market leader in women’s ethnic space. It has a healthy balance sheet with cash reserves worth | 140 crore

* BUY with a target price of | 860

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