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Yet another quarter of industry outperformance…

About the stock: Trent is India’s leading retailer with a presence across various consumer categories (550+ stores). Inherent strength of brands (Westside, Zudio, Star, Zara) and accelerated store additions have led Trent to be among the fastest growing companies in our retail coverage universe.

* ‘Westside’ (70% 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: 10%+)

* The next leg of growth for Trent continues to be from ‘Zudio’ (30% of sales), the value fashion brand, (revenue CAGR: 72% in FY19-22)

Q2FY23 Results: Trent continues to be the fastest growing apparel company with industry best revenue growth. Revenue compared to pre-Covid levels was at an impressive 220% vs. industry average of 120-135%.

* On a favourable base, sales grew 78% YoY to | 1813.6 crore. On a threeyear CAGR basis, revenue growth was at 30%, the highest among other lifestyle retailers

* Gross margins generally tend to be lower in Q2, mainly owing to EOSS (average gross margins in Q2: 46-48%). Q2FY22 was an unusual quarter wherein the company had recorded 52%+ gross margins. Hence, on a significantly high base, gross margins declined 510 bps YoY to 47.0%

* Furthermore, significantly higher opex (up 85% YoY) resulted in EBITDA margins declining 690 bps YoY to 15% (I-direct estimate: 17%). On a three year CAGR basis, EBITDA growth was at an impressive 27%.

What should investors do? Trent has been an exceptional performer with the stock price appreciating at ~35% CAGR in the last five years.

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

Target Price and Valuation: We value Trent at | 1730 based on SOTP valuation.

Key triggers for future price performance:

* We pencil in 240 store additions between Westside and Zudio for FY23-24E

* Liquidity position remains strong with cash & investments worth | 350+ crore that will enable it to tide over the current situation better than peers

* Zudio continues to be the growth engine for Trent. We expect revenues to grow at a CAGR of 50% in FY22-24E

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

Alternate Stock Idea: Apart from Trent, we also like Aditya Birla Fashion & Retail.

* ABFRL has charted out growth strategies to become a ~US$2.8 billion entity (| 21000 crore) by FY26E, translating to 15% CAGR in FY20-26E

* BUY with a target price of | 380/share

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