Buy Trent Ltd For Target Rs.3,700 by Motilal Oswal Financial Services Ltd
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LFL growth picks up to mid-single digit; gross margin improvement continues to support profitability
* Trent’s revenue growth accelerated to ~22.5% (vs. 18.5% in 1Q), driven by a pick-up in LFL growth to mid-single digit (after several quarters of muted LFLs), likely due to the easing store cannibalization impact in metros/tier 1 towns and improved performance in tier 2+ towns.
* Despite inflationary pressures, the company continues to surprise with ~120bp YoY gross margin expansion, likely driven by rising Westside contribution and improved product offerings.
* 2Q pre-IND AS EBITDA rose ~37% YoY, driven by 150bp margin expansion on account of better gross margin and operating leverage, partly offset by higher employee costs (increase in minimum wages).
* Management continues to prioritize cluster densification strategy and deepening Zudio’s market presence in tier 2+ cities. The focus remains on driving profitable growth with strong return metrics and cashflows.
* We raise FY27-29E standalone Pre IND-AS EBITDA by ~3-4%, largely driven by slightly higher growth and operating leverage.
* We now build in a FY26-29E CAGR of ~21%/28%/22% in standalone revenue/Pre-Ind AS EBITDA/Adj. PAT.
* We reiterate our BUY rating with a revised TP of INR3,700, premised on 35x Dec'28 pre-IND AS EV/EBITDA for Trent standalone (Westside+Zudio).
Revenue growth acceleration and stronger gross margin drive beat
* 2Q standalone revenue at INR57.9b grew 22.5% YoY (higher than our estimated ~18% YoY), driven by ~26% YoY net area additions as revenue per sq ft fell ~5% YoY (vs. ~10% YoY decline in the previous two quarters).
* Trent’s LFL growth for the fashion portfolio was in mid-single digit in 2QFY26 (vs. low-single digit in 1Q).
* Gross profit grew 26% YoY to INR25.8b (6% beat) as gross margin (GM) expanded ~120bp YoY to 44.5% (~70bp ahead).
* Employee cost grew ~36% YoY (11% ahead), likely due to higher minimum wages, while SG&A and other costs rose ~20% YoY.
* Trent’s occupancy cost (rentals above EBITDA) grew ~25% YoY, while lease rentals (below EBITDA) rose ~10% YoY, resulting in overall rental growth of ~20% YoY (vs. 22.5%/26% YoY revenue/area growth).
* Reported EBITDA grew 30% YoY to INR10.5b, 7% ahead of our estimate of INR9.9b, with reported EBITDA margin expanding ~100bp YoY to 18.2% (~50bp beat), driven primarily by higher GM, partly offset by employee cost inflation.
* Standalone pre-INDAS EBITDA grew 37% YoY to INR7.9b, with pre-INDAS EBITDA margin of 13.7% (up ~150bp YoY). Standalone Pre-Ind AS EBIT margin stood at 11.6% (up ~110bp YoY).
* Depreciation surged 27% YoY, while interest costs remained contained (2% YoY). Other income declined 71% YoY (one-off boost in 2QFY26)
* Resultantly, PAT grew 9% YoY to INR4.9b (~9% beat), driven largely by higher growth and gross margin, partly offset by lower other income.
Valuation and view
* Despite the festive shift, Trent’s LFL growth recovered to mid-single digit as performance in the relatively newer tier 2 and beyond cities improve. Management continues to prioritize cluster-level revenue growth and market share gains across key micro-markets with focus on profitability, RoIC, and operational cashflows instead of just LFL growth.
* Despite persistent input cost inflation and supply chain headwinds, Trent is witnessing consistent margin expansion, supported by sourcing efficiencies, rising contribution from Westside, and operating leverage. Management remains focused on mitigating cost pressures through broader supplier engagement and supply chain interventions while preserving its competitive value proposition.
* We raise FY27-29E standalone Pre IND-AS EBITDA by ~3-4%, largely driven by slightly higher growth and operating leverage. We now build in a FY26-29E CAGR of ~21%/28%/22% in standalone revenue/Pre-Ind AS EBITDA/Adj. PAT.
* We reiterate our BUY rating with a revised TP of INR3,700 (earlier INR3,400), premised on 35x Dec'28 pre-IND AS EV/EBITDA for Trent standalone (Westside+Zudio)
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