IGI Logo

Surprising margin expansion despite deceleration in growth

• Despite a continued deceleration in revenue growth (+20% YoY) and a ~110bp YoY decline in gross margin, Trent delivered a strong EBITDA growth of ~37% YoY (17% beat), with margin expanding ~225bp YoY.
• The significant margin beat was led by effective cost control—employee expenses fell 7% YoY, while rental costs rose only 7% YoY, despite a 36% increase in retail area, reflecting the strength of Trent’s variable cost structure.
• However, the Star business underperformed with just ~7% YoY revenue growth, flat like-for-like sales, and a 14% YoY drop in revenue per sq ft to INR26.7k, (vs. 2% YoY uptick, despite a much larger base for DMart).
• Our FY26-27E EBITDA estimates remain largely unchanged as we expect store expansion-related costs to catch up over the next few quarters. while, we lower PAT by 3-6% due to higher depreciation. We build in with a 20%/18%/16% CAGR in revenue/EBITDA/PAT over FY25-28E, driven by aggressive store expansion.
• We continue to like Trent for its robust footprint additions, strong doubledigit growth, long runway for growth in Star (presence in just 10 cities), and potential scale-up of emerging categories (Beauty, Innerwear, Footwear, and LGDs). However, revenue growth acceleration remains a key trigger.
• Reiterate Buy on Trent with a revised TP of INR6,400, premised on 50x Sep’27 EV/EBITDA for the standalone (Westside and Zudio) business, ~3x EV/sales for Star JV, and ~7x EV/EBITDA for Zara JV.

Robust cost controls drive significant EBITDA beat

• Standalone revenue growth further decelerated in 1QFY26 to 20% YoY (vs. 57%/40%/37%/29% in the last four quarters), despite large back-ended store additions in Zudio (~130 net additions) in 4QFY25.
• Gross profit grew 17% YoY to INR21.5b (2% miss) as gross margin contracted ~110bp YoY to 45.1%.
• Occupancy cost (including rent) grew modest ~7% YoY (though rose 63% QoQ), despite ~37% YoY area additions in Zudio. We believe there could have been some reversals in rental provisions in 4QFY25. ? Surprisingly, employee costs declined 7% YoY and QoQ (21% lower than our estimate), despite significant store additions over the past few quarters.
• Other expenses grew 16% YoY (+12% QoQ), driving operating leverage.
• Driven by lower increase in rentals and employee cost, EBITDA grew 37% YoY to INR8.4b (17% beat), as margins expanded ~225bp to 17.5%. ? Reported operating EBIT margin expanded to 11.2% (vs. 10.4% YoY).
• PAT grew 24% YoY to INR4.2b (19% beat) as higher EBITDA was offset by lower other income (-11% YoY, 26% below).

After back-ended growth in 4QFY25, store expansion remains muted in 1QFY26

• Store expansion activity remained subdued in 1QFY26, with store count across fashion formats stable QoQ at 1,043 stores (up 27% YoY).
• Westside added just one store but also closed one, resulting in a flat store count of 248 (+9% YoY). However, the retail area increased ~20% YoY as Trent added larger Westside stores during FY25.
• Zudio witnessed 11 new store openings, though these were offset by 10 store closures. As a result, the company effectively added only one net store to reach 766 stores (+37% YoY). However, similar to Westside, with rising store sizes, the retail area increased ~54% YoY.
• Further, there was a consolidation of one store in Trent’s other fashion formats to 29 stores (-19% YoY).

Star: Subdued performance with flat LFL and one net store closure

• Revenue growth decelerated to ~7% YoY (vs. 29%/27%/25%17% YoY in the last few quarters) as LFL growth moderated to flat YoY (vs. ~22%/2% in 1QFY25/4QFY25).
• STAR consolidated one store during the quarter and has a footprint of 77 stores.
• Calculated revenue per sq ft declined 14% YoY to INR26.7k (vs. 2% YoY uptick to INR36.6k/sq ft for DMart) and revenue per store declined 5% YoY to INR449m.
• The share of own-brand offerings now contributes ~73% to Star’s revenue.

Highlights from the management commentary

• Like-for-like growth for Trent’s fashion concepts was in low single digits due to the early onset of monsoon and geopolitical disruptions. However, revenue growth across comparable micro-markets remained healthy.
• Trent’s strategy is centered on expanding revenue share and presence in key markets by increasing store density and improving portfolio quality rather than focusing solely on like-for-like store performance.
• Simultaneously, Trent is entering emerging Tier 2/3 cities with significant longterm potential, although revenue trajectories in these newer markets may differ from mature metro locations due to varying levels of fashion adoption and consumption density.
• Management indicated that investments in technology and automation in recent years have driven stable operating economics and operating leverage.
• Emerging categories, including beauty and personal care, innerwear, and footwear, contributed to 21% of standalone revenue (vs. 20% in 4QFY25).
• Online revenue grew 35% YoY, contributing 6%+ of Westside sales.

Valuation and view

• TRENT's growth rate has decelerated sharply in the last few quarters due to a weak LFL amid a subdued demand environment. However, the company continues to display strong cost controls to report healthy EBITDA growth.
• Back-ended strong store additions in Zudio from 4QFY25, coupled with a continued ramp-up with a focus on increasing share in key micro-markets, are likely to support growth.
• We continue to like Trent for its robust footprint additions, strong double-digit growth, long runway for growth in Star (presence in just 10 cities), and potential scale-up of emerging categories (Beauty, Innerwear, Footwear, and LGDs).
• Our FY26-27E EBITDA estimates remain largely unchanged, while we lower PAT by 1-5% due to higher depreciation. We build in with a 20%/18%/17% CAGR in revenue/EBITDA/PAT over FY25-28E, driven by aggressive store expansion.
• We reiterate BUY on Trent with revised TP of INR6,400, premised on 50x Sep’27 EV/EBITDA for the standalone (Westside and Zudio) business and ~3x EV/sales for Star JV and ~7x EV/EBITDA for Zara JV.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412