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EBITDA miss led by high expenses, GM contraction

* TRENT continued to deliver stellar revenue growth of 54% YoY (in line) in 1QFY24, with 12% growth on LFL basis for Westside. However, with a high mix of Zudio (lower GM segment) and aggressive store adds, gross/EBITDA margin contracted 480bp/ 400bp, leading to a 24% EBITDA miss.

* We largely maintain our EBITDA estimates, building in a 38% CAGR in consolidated revenue/EBITDA over FY23-25, backed by strong footprint addition and robust LFL growth across segments. Star’s improving store metrics offer a further opportunity. We retain our BUY rating with a TP of INR2,070, given the strong growth opportunity for TRENT

Revenue jumps 54% YoY (in line); EBITDA/PAT up 20%/45% YoY

* Standalone revenue reported robust growth of 54% YoY to INR25.4b (in line), led by strong store adds of 35% YoY and healthy LFL growth in Westside.

* Revenue from Westside/Zudio (Calc.) grew 36%/77% YoY to ~INR12.8b/ INR12.5b, with strong 12% YoY LFL growth in Westside and robust store adds. Westside/Zudio added 7/36 net new stores in 1QFY24.

* Gross profit grew 39% YoY to INR11.3b (5% miss). Margin saw a steep decline of 480bp YoY to 44.5%, likely due to a higher Zudio contribution.

* Employee/other expenses grew 61%/46% YoY to INR1.8b (7% higher than est.) and INR5.8b (9% higher than est.), respectively.

* EBITDA at INR3.7b was up 20% YoY (24% miss) as revenue growth was offset by sharp GM contraction and higher expenses. EBITDA margin at 14.4% contracted 400bp YoY. Pre-Ind AS EBITDA (Calc.) stood at ~INR2.5b with margins of ~10% (vs. ~12% in 1QFY23).

* Consequently, PAT grew 45% YoY to INR1.5b (45% miss) due to the EBITDA miss.

Highlights from the management commentary

* Store openings: The company opened 7/40 Westside/Zudio stores in 1QFY24 and closed 4 Zudio stores, taking the total store count to 221/388 Westside/Zudio stores.

* 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 revenue through Westside.com and other Tata group platforms contributed over 4% of Westside revenues.

* Growth in new product categories: Emerging categories (beauty and personal care, innerwear and footwear) contributed over 19% of standalone revenue

Valuation and view

* While the discretionary category is seeing a challenging demand environment, with peers seeing a decline in same store sales, TRENT has been a standout with record 12% LFL growth. Further, despite adding stores aggressively, the company has observed limited balance sheet risk or weakness in operations.

* TRENT’s industry-leading revenue growth is mainly 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 increase our revenue estimates by 7%/9% for FY24/FY25, but cut EBITDA margin by 130bp/150bp. As a result, we retain our EBITDA estimates, factoring in standalone revenue/EBITDA CAGRs of 38% over FY23-25, led by a strong 28% footprint addition and healthy SSSG.

* We assign 33x 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, and arrive at a TP of INR2,070. We reiterate our BUY rating on the stock.

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