Motilal Oswal: Maintain ‘buy’ on Trent; target price at Rs 515

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Published: September 12, 2019 2:04:41 AM

Standalone revenue increased 23% to Rs 25.3 bn in FY19, primarily led by Westside (+18%) and Zudio (newly started fast fashion value format; +42% to Rs 2 bn).

Trent intends to raise Rs 15 bn to fund its growth plans, of which Rs 9.5 bn is already raised from Tata SonsTrent intends to raise Rs 15 bn to fund its growth plans, of which Rs 9.5 bn is already raised from Tata Sons

Standalone revenue increased 23% to Rs 25.3 bn in FY19, primarily led by Westside (+18%) and Zudio (newly started fast fashion value format; +42% to Rs 2 bn). However, the EBITDA margin contracted 40 bps to 9.3%, which, in our view, can be attributed to losses at Zudio. Westside continued delivering steady revenue/sq ft. growth of 2.5% to Rs 10.2k in FY19. Separately, Zudio’s revenue/sq ft. stood at Rs 14,000 for independent stores on a like-to-like basis, which is significantly higher than the industry average of Rs 8-10k. Against this backdrop, management in its AGM revealed its plan to add 35-40 Westside stores and 100 Zudio stores.

Trent intends to raise Rs 15 bn to fund its growth plans, of which Rs 9.5 bn is already raised from Tata Sons.

Zara’s revenue grew strongly by 17% in FY19. However, PAT declined 13% with the margin shrinking 320 bps to 10.7% due to higher COGS.

Throughput remains strong though, with revenue/store at Rs 682 m. Zara’s growth has been slow given its limited presence of 22 stores. We nevertheless see huge growth opportunity for this format in India. Star continued exhibiting a dismal performance with revenue growth of meager 6% to Rs 10 bn.

In our view, unless revenues scale up to Rs 40-50 bn, the format will likely face challenges in delivering profitability given its wafer-thin gross margin of 22%. Star has shut all small stores; it now focuses on the larger-store format.

Trent’s overall RoCE remained weak at 6.4% in FY19. Also, overall RoIC stood at 10.5%, as against ~17% for Westside, due to losses at Star and Zudio. In our view, aggressive investments in store addition could put pressure on the margin and return profile in the near term. However, overall margin, RoIC and RoCE should reach high teens once it achieves healthy scale.

Given consistent SSSG and store throughput led by planned acceleration in store addition, Trent is likely to deliver stable growth hereon. It has a sticky business with a strong private label share offering exclusivity and also enjoys a loyal customer base. This will likely allow it to garner premium valuations. We value Westside at 27x EV/EBITDA, Zara at 27x EV/EBITDA and Star at 1x EV/sales to arrive at a target price of Rs 515. Maintain Buy.

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