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MOSL: TRENT (Buy)-Revenue impressive but store add-led opex dilutes earnings

Trent: Revenue impressive but store add-led opex dilutes earnings

(TRENT IN, Mkt Cap USD2.7b, CMP INR541, TP INR605, 12% Upside, Buy)

 Westside, Zudio fuel growth: Despite the slowdown in consumer spending, TRENT's revenue grew strongly by 32% YoY to INR8.2b (7% beat), led by a strong performance at Westside (revenue up 23% YoY with healthy 13% YoY SSSG). Zudio's revenue grew 150% YoY to INR1.2b (now contributing 15% of overall revenue), led by strong store adds. Our channel checks indicate 23/60 store adds for Westside/Zudio in 1HFY20, and we expect the strong space of store adds/capex to continue post the INR9.5b fund raise in 1QFY20.

• Aggressive store adds dent bottom line: While revenue growth was impressive, the gross margin was under pressure with a contraction of 290bp YoY to 47.8% on account of the increasing share of low-margin Zudio. PBT stood at INR578m on Ind-AS 116 basis and at INR620m (+23% YoY; our estimate: INR427m) on ex-Ind-AS 116 basis. However, this is after the contribution of other income, which increased 3.5x to INR433m. According to our calculations, ex-Ind-AS 116 EBITDA grew by a meager 5% to INR623m (17% miss), as RM/employee/rent costs were up 41%/35%/63% YoY on account of high pace of store additions. For 1HFY20, revenue/EBITDA increased 31%/23% YoY on ex-Ind-AS 116 basis.
• Focus likely to be on store adds in FY20: We build in healthy standalone EBITDA/PAT CAGR of 32%/41% over FY19-22, driven by strong average store adds of ~35/80 for Westside/Zudio. The dilution in earnings in FY20 due to aggressive store adds in Zudio should be transitionary, as our channel checks indicate that Zudio's revenue/sq.ft stands at a strong ~INR14,000 for stores that are 6-9 months old. However, we believe that accelerated store adds will help it reach 190/290 stores in FY21/22, allowing it to command a 6% EBITDA margin and contributing 9% of EBITDA, fueling earnings growth.