Buy Trent; target of Rs 785: ICICI Direct

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ICICI Direct's research report on Trent

Despite the challenging environment, Trent reported steady operational Q2FY21 numbers. With gradual opening of stores, it is seeing a rise in offtake on a MoM basis. Standalone revenues (including Westside, Zudio and Landmark formats) de-grew 44.7% YoY to Rs 452.1 crore in Q2FY21 (I-direct estimate: 47.0% de-growth, Q1FY21: Rs 96.3 crore). Owing to higher discounting and enhanced share of Zudio, gross margins fell sharply by 695 bps YoY to 40.9%. However, it has significantly curtailed operating overheads, with employee & other expenses down 31% each to Rs 57.4 crore and Rs 121.3 crore, respectively. Hence, EBITDA was at Rs 6.4 crore (Q1FY21: Rs 119 crore loss; with margin of 1.4%). Other income came in at Rs 36.4 crore of which Rs 22.4 crore pertains to lease rent waiver. Reported PBT losses narrowed down sequentially to Rs 73.3 crore (Q1FY21: Rs 182.2 crore). Owing to deferred tax asset (Rs 25.2 crore), the company reported net loss of Rs 48.1 crore (Q1FY21: Rs 139.5 crore loss). Given the inherent strength of the brands, recovery rate has improved significantly from mere 38% in July to 70% in October. Further, the management indicated that consumer sentiments have improved in the recent weeks running up to Diwali.

Outlook

Trent has over the years consistently outperformed peers given the strong brand patronage (Westside, Zudio, Star, Zara) and proven business model (Westside: 99% private label). Given the encouraging trends in footfall traction, we anticipate revenue trajectory to further accelerate in H2FY21, coupled with better profitability. 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 785 based on SOTP valuation (previous TP: Rs 680).

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