Buy Trent; target of Rs 680: ICICI Direct

ICICI Direct's research report on Trent

As expected, Trent reported a washout Q1FY21. High store concentration in worst hit Coivd-19 states (~ 17%, 16% of Westside, Zudio stores in Maharashtra) and higher presence in malls (~50% for Westside, 25% for Zudio) further hampered store operations due to stringent measures by local authorities. Subsequently, the company reported revenue de-growth of 87% YoY to Rs 96.3 crore (April: 0%, May: 8%, June: 32% pre-Covid sales YoY). The company made provisions worth Rs 40 crore towards inventories that led gross margins to contract substantially to 13.3% vs. 53% in Q1FY20. However, considering encouraging traction post lockdown relaxations, the company may reverse it in ensuing quarters. Due to cost rationalisation measures, other expenses, employee expenses de-grew 57%, 18% YoY, respectively. EBITDA losses were at Rs 119.1 crore. Other income grew 50% YoY to Rs 52.9 crore of which Rs 36 crore pertains to rent related waivers. Owing to deferred tax asset (Rs 43 crore), Trent reported net loss of Rs 139.5 crore. Overall 90% of Westside, Zudio stores have now reopened. EOSS, which began from August 1, saw healthy offtake with ~3x jump in revenues. As per the management, while footfalls are at ~35% of pre-Covid levels better conversion ratio, higher ATS led to sales at ~55% recovery rate.

Outlook

Trent was one of the fastest growing companies (30%+ growth) before pandemic significantly derailed the revenue trajectory. While discretionary spending may stay muted in near term, inherent strength of brands (Westside, Zudio, Star, Zara) and proven business model (Westside: 99% private label), will enable Trent to revive its revenue growth trajectory rapidly as and when the impact of Covid-19 is phased out. Also, healthy b/s (net cash positive) will enable it to tide over the current situation better than peers. We reiterate BUY with revised TP of Rs 680 based on SOTP valuation (previous TP: Rs 560).

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