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Sharp GM fall dilutes strong revenue growth

* Trent continued to deliver stellar revenue growth of 75% YoY, with 23% growth on a LFL basis for Westside. However, instead of passing on high raw material costs to customers, it absorbed them. This, combined with extended EOSS discounting and an increased proportion of the lower GM format Zudio led to a 830bp YoY decline in GM. This aided in inventory clean up. FY23 EBIT margin (on Pre IND-AS 116) improved to 7.7% v/s 7.4%/6.6% in FY22/20.

* We expect a consolidated revenue/ EBITDA CAGR of 26%/34% over FY23- 25, backed by strong footprint addition and robust LFL growth across segments. We retain our Buy rating with a TP of INR1,600, given the strong growth opportunity for TRENT.

EBITDA up 39% YoY (big miss), dragged by lower gross margins

* Standalone revenue reported a strong growth of 75% YoY to INR20.8b (inline), aided by strong footprint addition and healthy LFL growth in Westside.

* Revenue from Westside/Zudio (Calc.) grew 33%/2.6x on a YoY basis to ~INR10.1b/INR10.5b, with a strong 23% YoY LFL growth in Westside. Westside/Zudio added 14/119 new stores in FY23.

* Gross profit grew 46% YoY to INR8.5b (10% miss) with a steep margin contraction of 830bp YoY to 40.8%, possibly due to a) higher RM prices and b) increase in Zudio concentration.

* EBITDA at INR2.1b was up 39% YoY (23% miss) as the revenue growth was offset by a sharp GM contraction. EBITDA margins at 10.2% saw a contraction of 270bp on a YoY basis. Pre-Ind AS EBITDA (Calc.) stood at ~INR1.5b with margins of 3.6%. FY23 EBITDAM stood at 7.1%. ? ‘Other income’ grew 26% YoY to INR1.3b (estimated INR174m), which was mainly due to the impact of lease modification/ termination and certain other amounts under INDAS 116.

* Consequently, PAT stood at INR1.1b, up 40% YoY (78% beat) on the back of higher other income offsetting the contraction in gross margin.

* OCF for FY23 improved to INR6.6b v/s INR1.5b in FY22, led by improved profitability and release of working capital. Net capex stood at INR2.1b and the company remains net debt free.

Highlights from the management commentary

Store openings: The company has opened 3/26 Westside/Zudio stores in 4QFY23, taking the total store count to 214/352 Westside/Zudio stores. For FY23, the company is estimated to have added 14/119 stores for Westside/Zudio.

* Star Bazaar gaining traction: With store-level economics showing improvement, there is optimism about Star Bazaar’s distinctive and scalable model, making it a crucial and supplementary growth driver for the portfolio.

* Online business: Online revenues through Westside.com and other Tata group platforms contributed over 6% of Westside revenues. The company re-iterated its plans to invest significantly in resetting the technology stack across the entire value chain to make it commensurate with the growing scale and the growth agenda.

* Growth in new product categories: Emerging categories (beauty and personal care, innerwear and footwear) contributed to over 18% of standalone revenues.

Valuation and view

While the discretionary category is seeing a challenging demand environment, Trent has continued to grow at a healthy pace with steady SSSG. Further, despite adding stores aggressively, the company has observed limited balance sheet risk or weakness in operations.

* TRENT’s industry-leading revenue growth is majorly driven by: a) strong SSSG and productivity, b) strong 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 cut our FY24/25 EBITDA estimate by -2%/-1%, factoring in standalone revenue/EBITDA CAGR of 27%/34% over FY23-25, led by a strong 21% footprint addition and healthy SSSG.

* We assign 27x EV/EBITDA to the standalone business (Westside and Zudio; premium over 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 INR1,600. We reiterate our BUY rating on the stock.

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