SELL on Trent - Limping back to normalcy - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

Trent's 2Q performance remained sub-par, especially on profitability. Revenue declined 44.7% to Rs. 4.5bn (HSIE: Rs. 4.7bn). While LTL revenue recovery rates continue to improve progressively (70% of the base quarter in Oct-20 vs 38% in Jul-20). Margin delivery remains weak as we suspect high inventory provisions may have played spoilsport. Gross margin declined ~695bp YoY to 40.9% (HSIE: 45%). The company remains amongst the few well-capitalised retailers with an estimated net cash position (ex-JV/associate investments) of Rs. 8.15bn. We largely maintain our FY22/23 EBITDA estimates and our SELL recommendation on the stock with an SOTP-based target price of Rs. 510/sh (implying 28x Sept-22 EV/EBITDA).

2QFY21 highlights: Revenue declined 44.7% YoY to Rs. 4.5bn (HSIE: Rs. 4.7bn) as like most apparel retailers, the recovery path remains arduous. However, Oct-20 recovery rates at 70% (vs 38% in July-20) is encouraging. All stores are now operational with receding local restrictions. We suspect the flagship store Westside may have lagged company growth (HSIE: ~50% decline), given its higher Metro/Tier 1 presence and higher ticket size vis-à- vis its value format Zudio. Margin delivery remained weak as we suspect higher inventory provisions to have played spoilsport. Gross margin declined ~695bp YoY to 40.9% (HSIE: 45%). GM miss as well as higher-than- expected SG&A expenses led to a significant EBITDAM miss (1.4% vs HSIE: 12%). Net cash position at Rs. 8.15bn remains healthy. The retailer did shave off inventory by Rs. 2.3bn in 1H, but this may include some write-offs too.

Outlook: Trent remains amongst the few well-capitalised apparel retailers in India (net cash position (ex-JV/associate investments of Rs. 8.15bn) and is likely to withstand the dent on business due to the pandemic. However, valuations remain uncomfortably high (~40x Post-IND-AS116 Sep-22 EV/EBITDA). Ergo, we maintain our SELL recommendation on the stock with an SOTP-based TP of Rs. 510/sh (implying 28x Sept-22 EV/EBITDA).

Shares of TRENT LTD. was last trading in BSE at Rs.670.1 as compared to the previous close of Rs. 678.05. The total number of shares traded during the day was 14677 in over 1010 trades.

The stock hit an intraday high of Rs. 679.45 and intraday low of 650.2. The net turnover during the day was Rs. 9880104.

Source : Equity Bulls

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