Buy Trent; target of Rs 310: ICICI Direct

ICICI Direct's research report on Trent

Standalone revenues for Q1FY18 (which includes Westside and Landmark formats) grew 25% YoY (up 10% QoQ) to Rs 499.2 crore (I-direct estimate: Rs 455.3 crore. LTL growth for Westside was at 14%. During the quarter, Westside opened three stores taking the total count (excluding closures) to 111 stores as on Q1FY18 Better inventory management has led to a 70 bps improvement in gross margins to 55% in Q1FY18 compared to 54.3% in Q1FY16. Moreover, controlled other operating expenses accelerated the improvement in EBITDA margins, which improved 280 bps YoY to 11.7% (I-direct estimate: 8.2%). Subsequently, EBITDA grew 65% YoY to Rs 58.5 crore (I-direct estimate: Rs 37.2 crore) compared to Rs 35.5 crore in Q1FY17 and Rs 14 crore in Q4FY17 Benefits of lower finance costs (down 10% YoY) and higher other income (up 12% YoY) were completely offset by higher taxation (32% of PBT in Q1FY18 compared to 27% in Q1FY17). Resultant PAT grew 64% YoY to Rs 38.2 crore (I-direct estimate: Rs 24.8 crore).

Outlook

In its AGM, the management has shared its aggressive store expansion plan and enhanced focus on profitable growth. Ind-As accounting now adjusts profit/loss from JVs (THL, Inditex) in PBT, unlike earlier throughout the P&L. During FY17, lower profitability in Zara (Rs 47.6 crore vs. Rs 108 crore in FY16) & losses in Massimo Dutti, THL of Rs 1 crore, Rs 52.5 crore, respectively, resulted an overall loss of Rs 9 crore (vs. profit of Rs 8 crore in FY16) from JVs in consolidated reporting. Change in strategy to focus on medium format stores (5000-10000 sq ft) under Star banner and revival in Zara would provide an additional delta in PAT for Trent. Though expensive, the valuations capture Trent’s franchisee quality. We maintain BUY rating on the stock with a revised target price of Rs 310.