Maintain ADD on Trent - Savings in Cost of Retailing > GM dilution - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities.

Trent (Q4FY20): Savings in Cost of Retailing > GM dilution. Maintain ADD
(TP Rs 460, CMP Rs 443, MCap Rs 157bn)

FY20 was all about treading the Gross margin dilution-cost savings equation successfully - Signed, sealed and delivered. Std. revenue grew 25.5% YoY (Highest in universe). Trent's flagship - Westside grew by 17% YoY (SSSG: 7.3%) in FY20. (YTD Feb-20 SSSG: 12.6%). Zudio lived up to the hype. Zudio's revenue is estimated to have breached Rs. 4bn+. While GMs declined 180bp to 49.5% given the increasing skew of Zudio in mix, the retailer has been smartly using Zudio+Westside supply chain savings to invest in sharper pricing and still protect EBIT margins. Cost of retailing is estimated to have come down by ~360bp YoY in FY20. Adj. EBIT stood at 7.2% for FY20.

View: Trent, like peers will go through its COVID19 blues, however, its ability to navigate the crisis is strongest in peer set as the retailer remains well capitalized (Rs. 7.24bn of cash/eq). Ergo it remains best-placed to gain market share in the aftermath of the crisis. Note: Trent has already utilized ~Rs. 8/9.5bn raised recently (via Tata Sons). We maintain our ADD RECO with an SOTP-based TP of Rs. 460/sh (earlier: Rs. 490/sh). FY21/22 EBITDA cuts aren't comparable as we have moved to IND-AS 116 accounting.

Growth remains robust for 4Q (Pre-COVID19): While revenues grew by 8% to Rs. 7.23bn (HSIE: 7.25bn), Jan+Feb-20 and YTD Feb-20 revenue grew 33%. Westside's revenue is estimated to have declined by 3% in 4Q. However, growth momentum in Jan+Feb-20 remained robust. Westside grew 17% YoY (SSSG: 7.3%) in FY20. Note: YTD Feb-20 SSSG for Westside stood at 12.6%. We estimate Zudio to have breached the Rs. 4bn revenue mark.

The Cost Savings > GM Dilution story continues: Trent has been smartly reducing supply chain costs by ensuring Zudio piggybacks on Westside's supply chain. Cost of retailing is estimated to have declined by ~240bp in 4Q to 40% of sales (HSIE: 43%). This has more than made up for any Zudio-led dilution in GMs. (GMs down 98bps YoY in 4Q). Consequently, Adj EBITDAM is estimated to have expanded by 141bp to 6.5% YoY (HSIE: 3.1%). Cost savings were largely a function of rental and other opex savings. Rent expense (As % of sales) is estimated to have improved by 80bp YoY to ~12%.

Expansion remained Zudio-heavy: Trent added 63 stores in FY20 (Base: 195). However, as expected the skew remained Zudio-heavy. Westside/Zudio/Utsa added 15/41/2 stores resp in FY20. 21 stores (4 Westside and 21 Zudio stores) were under fit outs and are expected to resume operations once lockdown measures are relaxed further. Since the relaxation of lockdown over the last fortnight, ~70 stores have commenced operations.

Balance sheet remains strongest in peer-set; CC cycle stable: Trent remains well-capitalized to navigate the COVID19 biz impact. (Cash & Eq: Rs. 7.24bn). Cash conversion cycle remains stable at 38 days.

Shares of TRENT LTD. was last trading in BSE at Rs.456.2 as compared to the previous close of Rs. 442.7. The total number of shares traded during the day was 24770 in over 1917 trades.

The stock hit an intraday high of Rs. 462.2 and intraday low of 437.85. The net turnover during the day was Rs. 11196840.

Source : Equity Bulls

Keywords