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Recovery much better v/s first wave; aggressive store adds in place

* TRENT’s revenue came in 57% below pre-COVID levels (1QFY20; 12% miss), better than ABFRL / Shoppers Stop and V-Mart. However, format-wise, we estimate Westside to be 60–65% below pre-COVID levels, in line with peers. EBITDA/PAT continued to report loss at INR318m/INR838m (6% miss).

* Unlike last year, recovery post the lifting of the lockdowns has been swift, with July’21 at >80% of pre-COVID levels. We largely maintain our FY23E estimate, factoring in a 19%/22% CAGR for Revenue/EBITDA over FY20– 23E, on the back of strong recovery and continued steady store adds. Nevertheless, the rich valuation leaves a limited upside. Maintain Neutral.

Revenue fueled by Zudio, store adds; net loss narrows YoY (6% miss)

* Standalone revenue grew 3.4x YoY to INR3.3b (12% miss), aided by higher operation levels of 46% in the Fashion business (v/s 26% in 1QFY21). Revenues, however, were lower by 57% vis-à-vis pre-COVID levels (ABFRL / Shoppers Stop / V-Mart were down by 63%/76%/61%).

* As per our workings, Westside declined 60–65% v/s pre-COVID levels, while Zudio (with more than double the stores) has grown 59% v/s pre-COVID levels.

* The gross margin improved to 53.6%, better than the pre-COVID margin of 53%. Gross profit jumped to INR1.8b (up ~14x YoY), aided by strong growth in revenues.

* Subsequently, EBITDA loss narrowed by 73.3% YoY to INR318m (v/s est. loss of INR214m), aided by higher gross profit and various cost mitigation measures related to property payouts and operating expenditure.

* Negotiations over rentals with landlords during the lockdown period resulted in aggregate savings of INR350m, recognized in other income. Therefore, other income stood at INR523m (down 1% YoY).

* PBT loss narrowed by 39.5% YoY to INR1.1b. Adjusted for impact of INR250m from Ind-AS 116, PBT loss stood at INR852m.

* Net loss narrowed to INR838m (down 40% YoY; 6.3% miss)

* It opened up 10/4 new Westside/Zudio stores in 1QFY22, taking the total store count to 184/137 stores. Furthermore, an additional 13/12 Westside/Zudio stores that were fitted out would open up once COVIDrelated restrictions are eased.

Management commentary on outlook

* Mr. Stephen Rayfield, the former Chief Executive Officer tendered his resignation and the board approved the appointment of Mr. P. Venkatesalu as the Chief Executive Officer for a term of three years with effect from 6th October 2021. The position of Chief Financial Officer is now vacant

* Easing restrictions and improving consumer sentiment are driving sharp recovery in its Fashion business, with July posting a revenue recovery of over 80% against FY20 levels.

* In 1QFY22, Westside and Zudio operated for 46% of the trading days, up from 26% YoY. By the end of the quarter, 80% of the trading days were operational – this has increased to 90% in recent weeks with the further easing of local restrictions.

* The online channel registered ~200% growth YoY; it continued to post >5% of Westside’s revenues.

Valuation and view

* Given the swift recovery since the easing of the lockdown restrictions, we expect FY22E revenue/EBITDA at 8%/13% above pre-COVID levels. We largely maintain our FY23E estimate, factoring in a 19%/22% CAGR for Revenue/EBITDA over FY20–23E, on the back of strong recovery and continued steady store adds.

* TRENT’s a) superior liquidity profile at a time when many small/unorganized retailers are under stress and b) continued aggressive store addition should enable growth at a healthy pace as the market recovers. Furthermore, Zudio, with its strong value format proposition, has recovered faster given the price downtrading in the market.

* We arrive at an SOTP-based TP of INR850. We value the stock at an EV/EBITDA of 27x for standalone (including Zudio), EV/EBITDA of 12x for Zara, and EV/sales of 1x for Star on FY23E. Trent’s industry-leading growth, backed by superior execution and a healthy balance sheet, warrants premium valuations. However, it already trades at a rich valuation of 36x EV/EBITDA on FY23E, leaving a limited upside. We retain our Neutral rating.

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