Tata Group's Trent Ltd reported robust Q3FY23 (October-December) earnings, which were ahead of Street's expectations. The Tata Group company that houses apparel brands such as Westside, Zudio reported a 61% on year jump in its revenue to ₹2,171.5 crore led by increased footfalls, and strong growth across emerging categories like beauty, personal care, and footwear.
The company's earnings before interest, taxes, depreciation, and amortisation (EBITDA) grew 15% on year, while EBITDA margins at 15.5% were down 620 basis points on year because of gross margin pressure and higher operating expenses.
Further, the company's profit after taxes (PAT) rose 21% on year to ₹161 crore. The company ran 211 Westside stores as of December 2022, 326 Zudio stores, and 21 stores in other lifestyle concept stores.
After the company's success in the third quarter of FY23, majority of brokerages believe that its rapid growth trend will continue.
What do brokerages say?
Motilal Oswal Financial Services Ltd
According to the brokerage's report, the company's revenue growth remained strong in Q3FY23, supported by a significant expansion of its footprint and solid like-for-like sales (LFL) growth of 17% in Westside. However, due to lower gross margins brought on by a higher share of low-margin Zudio, the reversal of the inventory provision in the prior quarter, and discounting, standalone EBITDA only grew by 15% (19% miss), falling short of expectations.
"We expect a standalone revenue/EBITDA compound annual growth rate (CAGR) of 28%/30% over FY23-25, backed by a strong footprint addition and robust LFL growth across segments. We retain our 'buy' rating with a target price of ₹1,500, given the strong growth opportunity," said the brokerage in its report.
Additionally, the brokerage thinks that despite the difficult demand environment facing the discretionary sector, Trent has continued to grow at a strong rate with stable same-store sales growth (SSSG). Furthermore, it has only had minor balance sheet risk or operational difficulty despite the aggressive store addition.
As per the brokerage, the company's industry-leading revenue growth is majorly driven by strong SSSG and productivity, strong footprint additions, and Zudio’s strong value proposition.
"It continues to outperform its peers and offers a huge runway for growth over the next three-to-five years," added the brokerage.
Axis Securities Ltd
The brokerage believes the company's overall results are exceptional in terms of topline growth, and it expects that high traction will probably persist in the upcoming quarters as well. Future growth across all store formats will be driven by the company's focus on store expansion and updating existing locations with new formats.
"With a 38% upside potential from the current market price, we maintain a 'buy' rating on the stock, and we increase our FY23/24 estimates in line with long-term growth levers. We believe strong topline growth is likely to continue in the coming quarters given," said the brokerage in its report.
According to the brokerage, the company's overall footfall traffic has increased due to the emphasis on quick store development and ongoing shop renewal with new assortments. Additionally, the company's return profile is improving across all formats, and this includes Star Bazaar losing less money and gaining more traction with Inditex JV. Trent's strategy of pursuing small store footprints, competitive pricing, and a concentration on fresh and own brand items during the last couple of years has been successful, as evidenced by the success of its Star food company. The robustness and economic viability of this model are evident.
According to the brokerage house, the business maintained a rapid rate of expansion in Q3FY2023. In the third quarter of fiscal year 2023, the company reported revenue growth of 2.3 times pre-COVID levels and PAT increase of 8.4 times pre-COVID levels. Through greater contributions from online sales and emerging categories, Trent is observing a significant uptick in new initiatives/categories.
The brokerage also predicted that the company will do well in the near future thanks to a faster store development, higher contribution from the internet channel, and a rebound in the foods sector. Overall, robust growth recovery is anticipated for FY2023, although profitability will gradually improve as the pricing environment improves.
"We expect Trent’s revenue and PAT to report a CAGR of 43% and 66%, respectively, over FY2022-FY2025E. The stock has corrected by about 20% from its recent high and is trading at 28 times/22 times/18 times its FY2023E/FY2024E/FY2025E EV/EBITDA. With risk reward, strong growth prospects, and a lean balance sheet, we maintain 'buy' recommendation on the stock with a revised target price of ₹1,550," said the brokerage in its report.
Phillip Capital (India) Pvt Ltd
According to the brokerage report, the company continues to be its top pick as it is expected to deliver industry leading revenue/EBITDA CAGR of 29%/28% over FY20-25E with sturdy balance sheet.
“We have revised revenues for FY23/FY24 by 1.2%/2.3% given robuststore expansion and EBITDA for FY23/FY24 by -8.3%/-0.9% given the costs associated with ew store openings and Zudio sales mix each having lower margin profile. We maintain our rating at BUY with an target price of ₹1,525 (earlier ₹1,689),” said the brokerage.
Jefferies Equity Research
The brokerage in its report said that continuous network growth and LFL growth contributed to an increase in consolidated revenues, which was 12% more than expected. Gross and EBITDA margins missed expectations, although overall earnings were higher.
“We revise our revenue assumptions higher, although this is offset by lower margins. Overall, we largely maintain EBITDA estimates. We retain our ‘hold’ rating with an unchanged target price of Rs1,400,” said the brokerage.