EUR 120.00 For Business Accounts Only

MOSL: TRENT (Buy)-Preparing for next leg of growth; Focus on Westside and Zudio

Trent: Preparing for next leg of growth; Focus on Westside and Zudio

(TRENT IN, Mkt Cap USD2.1b, CMP INR435, TP INR500, 15% Upside, Buy)

 

Trent (TRENT) appears well positioned to capitalize on India's high-growth retail apparel market, given its ability to execute well in a fast-changing operating environment. The company is embarking on an accelerated growth strategy, particularly at Westside (with its thrust on women-centric fashion and private labels) and Zudio (margin-accretive apparel line-up), both of which hold a strong brand promise. In this note, we provide the rationale behind our positive stance on the company.

 

• Eying strong growth: Westside is a well-oiled business format with a right product proposition, pricing and favorable store economics. It now plans to replicate Westside's success in Zudio, which will have competitive pricing and value products targeted at the youth. This should drive healthy footfalls and conversions. Against this promising backdrop, the company targets to double its store count potentially in three years (adding 60 stores). Subsequently, we have revised our store addition estimate for Westside/Zudio to 35/40 annually v/s 23/25 earlier.
• Setting the base for growth: Keeping in mind its ambitious plans and accelerated growth, the company has announced equity fund raising plans of INR15.5b in end-June. The proceeds will largely be used to expand its capabilities, including (a) setting up of backend systems (warehouse and automation), (b) digitization of stores and processes to support pace of store adds, and (c) store addition along with select buy-outs of old stores. At the same time, the proceeds will also ensure TRENT remains a net cash company.
• Return on investment to improve over next three years: According to our calculations, Westside garners mid-teens RoCE, but the upcoming investments in scaling up both Westside and Zudio may keep the return profile in single-digits. We have revised our cumulative capex estimate by 3.4x to INR10.4b over FY19-21. Further, we expect RoIC to languish at ~10% in FY20E, but believe it will recover to healthy mid-teens level over the next 2-3 years on (a) Zudio driving scale benefits, (b) accelerated store addition, and (c) backend synergies. Over FY19-21, we expect revenue/EBITDA/PAT CAGR of 23%/27%/60%.
• Valuation & view: TRENT is likely to face near-term impact of equity dilution on earnings growth and RoIC. However, over a three-year period, the dilution could drive accelerated growth, which, in our view, is not fully captured in valuations as of now. Implied EV/EBITDA and P/E remain rich at 39x/58x on FY21E. We raise our SOTP-based TP to INR500 (v/s INR440 earlier), valuing Westside and Zara at 26x EV/EBITDA and Star at 1x EV/sales on Sep'21E. Westside and Zara are valued at a 30% premium to industry average. The implied TP is at par with the three-year average. Maintain Buy.