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Zudio scales up to | 1000 crore+ brand

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’ (72% 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+%)

* ‘Zudio’ (28% of sales), the value fashion brand, continues to provide the next leg of growth for Trent (revenue CAGR: 72% FY19-22)

Key Annual Report highlights:

* Zudio remains the fastest growing value fashion brand in India with revenues surpassing | 1000 crore in FY22. With the brand achieving scale, the brand reported its highest EBIT margin of 6% in FY22 (FY21: ~1%)

* Westside format surpassed pre-Covid levels from H2FY22 onwards with positive SSSG (FY22 gross revenue: | 2900 crore)

* Zara India reported strong topline growth of 61% YoY (115% of pre-Covid levels) despite muted store additions  Losses for Star Bazar widened YoY, mainly owing to higher discounts and sharper pricing

* Two to three new fashion concepts are in progress out of which one would be a beauty format standalone store (brand: ‘Landmark Xcite’)

* On a standalone basis, the company clocked 7.9% EBITDA margins (pre-Ind AS 116) in FY22 (FY20: 9.0%). At a consolidated level, EBITDA margins were lower at 4.2%, mainly owing to its subsidiary, Booker India

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 | 1470 based on SOTP valuation

Key triggers for future price performance:

* We pencil in 215 store additions between Westside and Zudio for FY23-24E

* Liquidity position remains robust with cash & investments worth | 600+ 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 its revenues to grow at a CAGR of 48% 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 is targeting revenues of ~US$2.8 billion by FY26E (TP: | 340)

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