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Surprises positively

Trent’s 3Q performance surprised positively. Revenue recovery at 83% of base quarter was commendable (HSIE: 81% recovery). Westside recovered 78% (Inline). Hence, the revenue beat has come from its value play – Zudio. Bigger surprise was on GM recovery, which expanded 574bp YoY to 56.4% (HSIE: 48%). We suspect GM expansion was led by (1) write back of the conservative inventory provisions made in 1Q (Impact of Rs. 140mn in 3Q), (2) better GMs in Zudio. Note: GMs are still down ~280bp in 9MFY21. Costs continue to normalise; hence, EBITDAM beat lags GM beat. We maintain our SELL recommendation on the stock with an SOTP-based TP of Rs. 575/sh (implying 32x FY23 EV/EBITDA). Note: TP change largely mimics EPS change.

* 3QFY21 highlights: Revenue recovery at 83.4% of 3QFY20 (Rs. 7.25bn vs HSIE: Rs. 7.05bn) was better than expected. Westside recovered 78% YoY (LTL growth: -26%), implying that Zudio overshot expectations. MoM sales trends are encouraging. Jan-21 EoSS sales witnessed similar traction as 3QFY20. GMs expanded 574bp YoY to 56.4% (HSIE: 48%). We believe GM expansion was led by (1) write back of the conservative inventory provisions made in 1Q (Impact of Rs. 140mn in 3Q), and (2) better GMs in Zudio. Note: GMs are still down ~280bp in 9MFY21 (47.6%). Rental concessions in 3Q/9MFY21 stood at Rs. 188/772mn. However, cost of retailing seems to be normalising faster than expected (31.6% vs HSIE: 28.3%). Ergo, EBITDAM expansion (486bp) lagged GM expansion. Adj. PBT/PAT declined/grew - 3%/+43%. YoY to Rs. 1/.8bn respectively. Rs. 0.8bn of the Rs. 9.5bn raised in FY20 (via Tata Sons) remain unutilized. The Board approved an enabling resolution to raise Rs. 5bn via NCD issuance largely to refinance existing debt.

* Outlook: Trent’s revenue and margin recovery seem most promising within our apparel universe. It remains well-capitalised (net cash position (exJV/associate investments of Rs. 8.15bn in 1H). However, valuations remain uncomfortably high (>40x FY23 EV/EBITDA). Ergo, we maintain our SELL recommendation on the stock with an SOTP-based TP of Rs. 575/sh.

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