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Strong growth momentum continues; margin contracts

* Continued momentum in footprint addition and robust LFL growth, led to a strong 78% YoY growth in revenue (2.2x over pre-COVID levels). However, lower gross margin, mainly attributed to a change in mix towards Zudio and higher OPEX (on account of aggressive store additions), resulted in an EBITDA margin contraction of 690bp YoY, 160bp below pre-COVID levels.

* We expect a consolidated revenue/EBITDA CAGR of 52%/72% over FY22- 24, backed by a strong footprint addition and robust LFL growth across segments. We retain our Buy rating with a TP of INR1,700, given the strong growth opportunity for TRENT.

EBITDA up 21% YoY as higher OPEX offsets strong revenue growth

* Standalone revenue growth remains robust, up 78% YoY to INR18.1b (in line). Revenue rose ~2.2x from pre-COVID levels, backed by a strong addition in footprint.

* Revenue from Westside (as per our workings) stood at INR10.2b, up 50% from pre-COVID levels, on the back of strong LFL growth of 20%. Revenue from Zudio (calculated) stood ~INR7.7b v/s INR3b in 2QFY22.

* Gross profit grew 60.2% YoY to INR8.5b (in line). Margin, however, contracted by 510bp YoY to 47%. Compared to normalized 2QFY20, gross margin contracted by 80bp, which can be attributed to an improved share of Zudio (over 40% v/s sub-15% in 2QFY20; operating at 40% GP v/s 58% for Westside).

* EBITDA grew 20.9% YoY to INR2.7b (~2x from pre-COVID levels; 6% miss) as the strong revenue growth was offset by a steep rise in employee and other operating costs. Pre-Ind AS EBITDA (calculated) stood ~INR1.2b in 2QFY23, with a margin of 7%.

* Consequently, PAT grew 47.9% YoY (big beat) to INR1.9b on the back of higher other income. 

Highlights from the management commentary

* Westside registered a LFL growth of 20% from pre-COVID levels (2QFY20). Across Westside and Zudio, it has a portfolio of over 500 stores. Our workings indicated that Zudio/Westside opened 50-55/15-20 stores.

* As the performance of stores added in the last 12 months is encouraging, the management is doubling down on growth in the medium term.

* Emerging categories (Beauty, Personal Care, Innerwear, and Footwear) continue to witness strong traction, with a 15% revenue share.

Valuation and view

* TRENT’s industry-leading revenue growth was majorly driven by: a) strong LTL sales growth and productivity, b) robust footprint additions, and c) Zudio’s strong value proposition. It continues to outperform its peers and offers a huge runway for growth over the next three-to-five years.

* We have maintained our FY23-24 revenue/EBITDA estimate, factoring in a consolidated revenue/EBITDA CAGR of 52%/72% over FY22-24, led by continued growth in revenue and 130/35 store additions for Zudio/Westside.

* We roll over our estimates to Sep’24, assigning 31x EV/EBITDA to the standalone business (Westside and Zudio; at a premium to our Retail Universe, given its superlative growth), 1x EV/sales to Star Bazaar, and 15x EV/EBITDA to Zara, thereby arriving at our TP of INR1,700. We maintain our Buy rating.

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