Buy Trent Ltd For Target Rs.7,350 by Motilal Oswal Financial Services Ltd
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Ramp-up in Zudio store openings drives robust growth
* Trent Ltd (TRENT) delivered yet another robust quarter, albeit slightly weaker than our high expectations.
* Revenue grew ~37% YoY (2% miss) as a pick-up in Zudio store openings (58 net store openings vs. 18 QoQ) was offset by a slight moderation in SSSG to high single digits (from double digits in 2Q).
* PAT rose ~37% YoY, though it missed our estimate by ~14% on account of a sharp 52% YoY increase in depreciation (+25% QoQ).
* Star business continued its strong growth momentum, with ~25% YoY growth, led by a robust 10% LFL growth.
* We cut our FY25-26E EBITDA by 2-4% and PAT by 7-8%. We build in FY24- 27 standalone revenue/EBITDA/PAT CAGR of 32%/34%/39%, driven by robust area additions and mid-single-digit productivity improvements.
* We assign 55x Mar’27 EV/EBITDA to the standalone business (Westside and Zudio; a premium over our Retail Universe, given TRENT’s superlative growth), ~3x FY27 EV/sales to Star JV, and 7x EV/EBITDA to Zara JV to arrive at our TP of INR7,350. Adjusting the value of Star and Zara, the stock is trading at 65x FY27 PE for the standalone business (vs. ~90x LT average 1- year forward PE). We reiterate our BUY rating.
Robust performance continues with 37%/34% YoY revenue/EBITDA growth
* Standalone revenue at INR45b (2% miss) grew 37% YoY (vs. ~40% YoY in 2Q), driven by 27% YoY net store additions and a high-single-digit LFL growth in fashion concepts (vs. double-digit LFL growth in 2QFY25).
* Gross profit grew 33% YoY to INR20.3b (4% miss) as margin contracted ~125bp YoY to 44.7% (80bp miss).
* EBITDA was up 34% YoY to INR8.4b (4% miss) as lower gross margin was offset by operating leverage benefits.
* Reported EBITDA margin contracted ~35bp YoY to 18.5% (30bp miss).
* As per the company, the standalone Pre-Ind AS EBIT margin stood at 13.1% (down 20bp YoY). The impact of leases on EBIT declined from 30bp in 2Q to a modest 10bp.
* PAT grew 37% YoY to INR4.7b (14% miss) on account of a slight EBITDA miss and higher D&A expenses (+52% YoY, 22% miss).
Store additions accelerate for both Zudio and Westside
* TRENT opened 82 stores and closed 6 stores in the fashion concepts to take the total store count to 907.
* The company added 14 Westside stores and consolidated two stores, taking the total count to 238 stores (vs. 226 QoQ).
* TRENT added a net of 58 (open 62; closed 4) Zudio stores, taking the total count to 635 stores, including one in the UAE.
* TRENT also opened six other format stores, taking the store count to 34.
Star: Healthy double-digit LFL growth sustains
* Revenue grew by 25% YoY (vs. 27% YoY in 2Q) led by 10% LFL growth (14% YoY in 2Q) and 10% store addition.
* Store count remained stable at 74 stores (8 net store additions in 9M).
* Calc. revenue per sqft was up 4% YoY to INR31.6k (vs. +4% YoY for DMart at INR39k), and revenue per store increased 12% YoY to INR512m (vs. +4% YoY for DMart at INR1.63b).
* The share of own brand offerings now contributes 74%+ (vs. 69% YoY) to Star’s revenue.
Highlights from the management commentary
* Fashion concepts (Westside, Zudio, and others) registered a high-single-digit LFL growth, despite subdued consumer sentiments.
* Emerging categories, including beauty and personal care, innerwear, and footwear, continue to contribute over 20% of standalone revenues.
* Online revenue continues to grow profitably through Westside.com and other Tata group platforms and contributes over 6% of Westside revenue (5% in 2Q).
* The Board approved the sale of ~29% stake in Massimo Dutti JV for INR0.2b (implying 0.7x FY24 sales).
Valuation and view
* TRENT continues to deliver robust performance, with a high-single-digit LFL growth and robust store area additions, despite weak discretionary demand.
* The company’s industry-leading growth, driven by healthy SSSG, store productivity, and robust footprint additions, along with the scale-up of Zudio and newer categories (Beauty, and Lab-grown diamonds), offers a huge runway for growth over the next few years.
* Further, TRENT’s focus on ramping up Star (currently 74 stores in 10 cities) through Fresh and its own brands provides an additional growth driver in the grocery segment.
* We cut our FY25-26E EBITDA by 2-4%, while we reduce our FY25-26E PAT by 7- 8% on account of the EBITDA cut and higher depreciation.
* We build in a standalone revenue/EBITDA/PAT CAGR of 32%/34%/39% over FY24-27, driven by a robust 21% CAGR in area additions and a mid-single-digit improvement in productivity.
* We assign 55x Mar’27 EV/EBITDA to the standalone business (Westside and Zudio; a premium over our Retail Universe, given TRENT’s superlative growth), ~3x FY27 EV/sales to Star JV, and 7x EV/EBITDA to Zara JV to arrive at our TP of INR7,350. Adjusting the value of Star and Zara, the stock is trading at 65x FY27 PE for the standalone business (vs. ~90x LT average 1-year forward PE). We reiterate our BUY rating.
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