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Healthy recovery, strong store adds to drive growth

* TRENT posted a 7% YoY revenue increase (7% beat), supported by easing restrictions and improving customer traction over Jan–Feb’21. EBITDA grew 47% YoY on a lower base, aided by high gross margins.

* The gradual recovery seen after nine months of lockdown has once again been derailed due to the second COVID wave. Thus, we revise down our FY22E revenue/EBITDA estimate by 26%/44%, but largely maintain FY23 estimates – factoring in recovery, coupled with the ongoing steady pace of store adds. Nonetheless, rich valuations leave a limited upside. Maintain Neutral.

Improving revenue trends in 4Q; EBITDA green shoots on strong GM

* Standalone revenue increased 7% YoY to INR7.7b (7% beat), led by easing pandemic-related restrictions and improved sentiment / customer traction over Jan–Feb’21. Adjusted for a 10- to 12-day shutdown last year, on LTL, revenue was down 5–7%.

* Format-wise, revenue for Westside was flattish YoY – with -4% same-store sales growth (SSSG) – while Zudio contributed 7% to total revenues.

* The gross margin was up 670bp YoY to 53.2%. EBITDA was up 47% YoY to INR1.4b on account of the low base of 4QFY20 (24% miss on higher-thanestimated opex; SG&A up 61% YoY). The EBITDA margin expanded 480bps YoY to 17.7%.

* Other income was up 110% YoY to INR724m (incl. INR120m toward rental adjustments). Reported PBT stood at 12x YoY to INR792m. On a pre-Ind AS 116 basis, PBT stood at INR692m. Reported PAT came in at INR505m, 19x YoY (20% miss), on account of the lower base of 4QFY20.

* Strong additions were seen, with 5/32 new stores opened for Westside/Zudio, taking the total store count to 174/133 stores. An additional 19/15 Westside/Zudio stores are ready for opening once COVIDrelated restrictions are eased.

* FY21 standalone revenue/EBITDA declined 36%/64% YoY to INR20b/INR2b. OCF/FCF increased 12%/18% YoY to INR4.1b/INR3.1b on account of release of cash from inventory clearance and nil tax paid in FY21.

Management commentary on outlook

* A sharp drop is seen in revenues following temporary partial lockdowns in various states, along with local restrictions on operating hours / days from mid-March (due to the second COVID wave).

* The company continues to engage with property partners to cushion the impact of the recent business disruption in several states.

* WestStyleClub – The loyalty program with 6m members saw the highest ever paid enrolments, aiding growth in bill values.

* The online channel registered 150%+ growth in 4QFY21; 5% of Westside’s total revenues during the quarter came from the online channel.

Valuation and view

* TRENT’s superior liquidity profile, net cash position, and aggressive store adds should enable growth at a healthy pace once the market recovers. Furthermore, Zudio has recovered faster as it caters to the Value Retail segment in lower tier cities.

* We significantly cut our FY22 revenue/EBITDA estimate by 26%/44% in FY22E (given the lockdown due to the second COVID wave), but largely maintain our FY23 estimates – factoring in revenue/EBITDA growth of 64%/62% over its FY20 performance (revenue/EBITDA CAGR of 18%/17% over FY20–23E) on the back of a) aggressively strong adds, b) stellar growth in Zudio, and c) a stable performance in Westside.

* We arrive at an SOTP-based TP of INR710, valuing the standalone biz (including Zudio) at 25x EV/EBITDA, Zara at 10x EBITDA, and Star at 1x EV/sales on FY23E. TRENT’s superior execution and healthy balance sheet warrant premium valuations, but it already trades at rich valuations of 34x EV/EBITDA on FY23E, leaving a limited upside for the stock. Thus, we remain Neutral.

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