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Healthy margin recovery drives earnings

* While revenue fell 17% YoY (in line), EBITDA saw a massive 26% beat on gross margin (GM) improvement of 570bp, benefiting from a provision write back of INR140m (190bp gain) and potential reduction in discounted sales. Adjusting for write-backs, EBITDA fell 4% YoY (16% beat).

* Its historic, industry-leading growth should resume in FY22 as aggressive store additions have already resumed. We have raised our FY22E EBITDA estimate by 18%, factoring in 28%/30% revenue/EBITDA growth over FY20. Maintain Neutral.

Revenue recovering gradually; EBITDA shoots up on strong GM

* Standalone revenue fell 16.6% YoY (v/s 27%/16% decline in SHOP/VMART) to INR7.2b (in line). Within this, Westside’s revenue fell 22% to INR5.8b, while the same for Zudio grew ~30% in 3QFY21 to about INR1.2b as per our workings. All stores are now operational with certain local restrictions.

* GM was up 570bp YoY at 56.4%. Adjusting for reset/write-back of INR140m in provisions, which were created in 1QFY21, GM grew 380bp to 54.4%, a beat of 640bp.

* EBITDA grew 3.7% YoY (v/s a 52%/11% decline in SHOP/VMART) to INR1.8b (26% beat). EBITDA margin expanded 490bp YoY to 24.8%. Adjusting for provisions, EBITDA fell 4%, 16% beat.

* Negotiations with landlords over rentals during the COVID-19 led lockdown period has resulted in aggregate savings of INR190m/INR770m for 3Q/9MFY21. The same has been accounted for in other income.

* Reported PBT rose 10% YoY to INR1b. On pre Ind AS 116 basis and adjusted for provisions, PBT stood at INR1b, up 21% YoY.

* Reported PAT stood at INR797m, up 43% YoY (51% beat).

* The company opened 28 new stores in 9MFY21, adding gross Zudio/Westside/Landmark stores of 20/6/2. In 3QFY21, it added a net 3/13/1 Westside/Zudio (standalone)/Landmark stores, taking the total store count to 169/101/15.

Valuation and view

* TRENT has a better liquidity profile v/s its peers and is currently enjoying a net cash position. This enables the management to eye aggressive store additions as evident in its 3QFY21 earnings. Zudio recovered faster as it caters to the value retailing segment in lower tier cities.

* We have factored in a FY22E revenue/EBITDA growth of 28%/30% (over FY20) on the back of aggressive growth in Zudio, leading to increased revenue contribution (to 23% in FY22E v/s 15% in FY20), and a stable 6% growth in Westside.

* We have revised our SoTP-based TP to INR660, valuing TRENT at an FY23E EV-to-EBITDA of 24x for the standalone entity (including Zudio), Zara at 10x EBITDA, Star at 1x EV-to-sales. TRENT’s superior execution and healthy Balance Sheet warrants a premium valuation, but it already trades at a rich valuation of 28x FY23E EV-to-EBITDA, leaving limited upside for the stock. Hence, we remain Neutral.

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