Trent Q2 Results Review - Margins Add Further Impetus To Gravity-Defying Growth Trajectory: Systematix

Systematix Research Report

Trent Ltd. delivered another strong beat on both growth and margins with 59%/72% revenue/Ebitda YoY growth. Revenue grew 59.4% YoY on standalone basis to Rs 28.9 billion, which is a strong four-year revenue compound annual growth rate of 37%. Growth continued to be led by a combination of strong like-for-like growth (10% across fashion concepts), aggressive store expansion in Zudio (27 additions in Q2) and strong traction in emerging categories like beauty and personal care, innerwear and footwear (19% contribution).

Margins also improved on account of lower operating expenses (down 232 bps), Employee expenses (down 88 bps) and rent cost (down 30 bps). Star Bazaar continued to see increased traction and growing sales density post footprint tightening coupled with focus on fresh foods and own brands.

Star Bazaar revenue grew 30% YoY and four-year revenue CAGR of 20%, entire growth coming from strong same-store sales growth and volume.

Trent’s margins also delivered a positive surprise this time with gross margin contraction of 230 bps YoY to 44.7% and Ebitda margin expansion of 120 bps to 15.9%, with operating profit at Rs 4.61 billion versus 2.67 billion in Q2 FY23. As of September 2023, the company had 223 Westside, 411 Zudio and 27 stores across other lifestyle concepts; during the quarter, Trent added six Westside and 27 Zudio stores.

We continue to like Trent for its industry-leading operating metrics (best-in-class SSSG and balance sheet), albeit better disclosures from the company would give us a lot more clarity and add to our conviction.

Trent has accelerated its pace of store openings, as it targets a bigger share of the fast/ value-fashion pie through Westside and Zudio and also adding new formats like Samoh and Misbu.

Star Bazaar’s improving trajectory, coupled with higher traction in Zara, should aid industry-leading growth over the medium term.

We increase our FY24/25 Ebitda estimates by 9%/10% to factor in higher growth and margins and now build in revenue/Ebitda CAGR of 37%/44% over FY23-25E, with return on equity estimated to improve to ~25.2% in FY25E.

We reiterate our 'Buy' rating on the stock, with an SoTP-based target price of Rs 2,750 (Rs 2,005 earlier), valuing the standalone business at 40 times (35 times earlier) FY25E enterprise value/Ebitda and other businesses on EV/sales basis.

The multiple increase reflects our belief that the sharp outperformance on growth and now margins as well will see an increase in valuation premium to peers. Disruptions from intensifying competition or slowdown in store additions are key risks.

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