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MOSL: TRENT (Buy)-Westside, Zudio progressing well; expect acceleration in store adds

TRENT: Westside, Zudio progressing well; expect acceleration in store adds

(TRENT IN, Mkt Cap USD1.9b, CMP INR397, TP INR470, 18% Upside, Buy)

 

• Revenue growth healthy; PAT supported by other income: Standalone revenue increased strongly by 30% YoY, led by healthy 21% growth in Westside sales. EBITDA was up 130% at INR1.6b on account of Ind-AS 116 reclassification - we, however, believe that this number makes limited sense in the absence of any company-provided reconciliation. Reported PBT was up 50% YoY at INR865m (INR85m/9% impact due to Ind-AS 116). On a pre-Ind-AS 116 basis, PBT would have been INR950m (+62% YoY; 32% beat). PAT (post Ind-AS 116) was up 51% YoY at INR579m (23% beat), mainly led by significantly higher other income (+6x YoY to INR359m).
• Westside, Zudio performing well but earnings growth elusive: Westside revenue grew by 21% YoY with strong SSSG of 12% YoY. We estimate Zudio to have contributed a strong INR700m revenue (v/s ~INR150m in the year-ago period). Yet, the PBT margin (ex-other income) shrank 240bp YoY, as rent + depreciation + interest increased 77% YoY, which we believe can be partly attributed to the accelerated store addition, particularly in the Zudio format.
• Focus likely to be on store adds in FY20; cutting PAT estimate by 7%: We have cut FY20/21 PAT estimates by 7% (3% attributed to Ind-AS 116 adjustment and 3% to low operating margins). We build in a healthy standalone PAT CAGR of 27% over FY19-21. However, given the focus on accelerated store adds in FY20, earnings growth could be back-ended in FY21. We value Trent on an SOTP basis, ascribing 17x EV/EBITDA to both standalone and Zara EBITDA (adjusted for Ind-AS 116) and 1x to Star revenue, to arrive at a TP of INR470 (prior: INR450). Maintain Buy.