Shares of Trent Ltd, the Tata Group retail arm, gained 2 percent for the second consecutive session to Rs 2,485.95 after the company reported stellar earnings on Tuesday, reflecting an 189 percent on-year surge in consolidated net profit, reaching Rs 228 crore in Q2 FY24.
This remarkable growth was propelled by robust revenue, a significant leap from the Rs 78.94 crore recorded in the corresponding quarter of the previous fiscal year.
At 10:15am, the shares of Trent were trading at Rs 2485.95, around 2.56 percent higher than the November 7 close.
At a consolidated level, revenues soared by 52.7 percent year-on-year to Rs 2,982 crore, compared to Rs 1,953 crore in the same quarter a year ago. The company achieved a net income of Rs 3,062 crore in the second quarter of the current fiscal year. "Consolidated revenue surpassed estimates as Zudio revenues more than doubled, driven by a 50 percent increase in store base, while Westside revenues grew by over 20 percent, according to our calculations," Jefferies said.
"The higher PAT growth, in our view, is partially due to franchise-driven expansion in Zudio," Nuvama Institutional Equities noted.
Trent's EBITDA (earnings before interest, taxes, depreciation, and amortization) climbed 78.5 percent on-year to Rs 456.57 crore, compared to Rs 255.81 crore a year ago. The EBITDA margin expanded to 15.3 percent from 13. percent year-on-year.
The company's EBITDA and profit surged due to revenue growth. "The higher mix of Zudio revenues and sharper in-store pricing contributed to this growth. However, the sequential GM improvement was surprising, considering that the second quarter also witnessed sales for Westside and Zudio. The EBITDA margin print came in 330 basis points ahead of estimates. Rental costs were lower than expected, possibly due to rental renegotiation," Kotak Institutional Equities said.
As of September 30, Trent’s portfolio comprised 223 Westside, 411 Zudio, and 27 stores across other lifestyle concepts. In Q2FY24, it added six Westside and 27 Zudio stores while closing four outlets in each format.
Emerging categories, including BPC (beauty and personal care), innerwear, and footwear, accounted for over 19 percent of standalone revenue, similar to Q1FY24. The company's emerging categories, such as beauty and personal care, innerwear, and footwear, continued to gain traction with customers.
The Star business, consisting of 65 stores, experienced increased customer traction with growing sales densities, reflecting a 30 percent operating revenue growth in Q2FY24 compared to the corresponding previous period.
"The Star format demonstrated significant improvement, registering a strong performance predominantly driven by like for like sales growth. Also, the general merchandise and apparel mix increased to 32 percent compared to 27 percent in Q2FY23," Nuvama Institutional Equities said.
Brokerage views
Jefferies: Hold
Rationale: "Trent is a structural story on the growing organised apparel market in India. However, expensive valuations keep us on the sideline. Maintain hold."
In the upside scenario, Jefferies expect a 40 percent CAGR in
standalone sales over FY23-26. "With a stronger balance sheet, Trent is better placed to fund growth and gain market share from peers and the unorganised market. Zara JV would see a strong recovery, on both the revenue and margin fronts. Overall, we assign an SoTP-based price
target of Rs 3,200. "
While in a downside scenario, Jefferies expects a 32 percent CAGR in standalone sales over FY23-26. "While share of online would grow, Trent faces aggressive competition from e-commerce majors in this channel. Zara JV, being dependent on malls, is impacted to a greater extent. In this scenario, Overall, we assign a price target of Rs 1,450," Jefferies said.
Nuvama Institutional Equities: Buy
Rationale: "Trent's valuation implies a premium, justified by its success with Westside's expansion, bolstering the belief in replicating the same at Zudio. Key risks persist: i) suboptimal economics for Zudio; ii) e-commerce; and iii) increased losses in subsidiaries."
Nuvama has upheld a Buy rating, revising the target price to Rs 2,855 from the earlier Rs 2,119.
Kotak Institutional Equities: Add
Rationale: "Raised estimates on robust performance in a tepid environment
We raise the FY2024-26 EBITDA by 31-41 percent, largely due to operating leverage. New concepts being seeded by Trent can keep revenue trajectory higher for longer," stated Kotak.
Kotak Institutional Equities has maintained an 'add' rating with revised target price of Rs 2,700, previously Rs 1,900.
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