Viewpoint

Trent Limited
Blockbuster performance

Sector: Consumer Discreationary

Trent Limited (Trent) reported a strong performance in Q3FY2020 in
a slowing discretionary environment, with revenues growing by ~33%
Result Update y-o-y and reported OPM improved significantly driven by operating
efficiencies and Ind AS 116. The company has been reporting
Change
consistent same-store-sales growth (SSSG) for Westside since the
View: Positive  past few quarters, which came in at ~10% for Q3FY2020 and 12%
for 9MFY2020. Higher discounting and change in revenue mix has
CMP: Rs. 663
impacted gross margins whereas implementation of Ind AS 116 drove
Upside potential: 16-18% á up reported OPM. We expect the SSSG trajectory for Westside to
sustain, backed by improving store fundamentals. Almost 100% share
á Upgrade  No change â Downgrade
of private labels will help the company improve its supply chain and
maintain its OPM expansion momentum. Aggressive store expansion
Company details in Westside, scale up of Zudio and higher investments behind the
brand will help the company maintain its operating performance in
Market cap: Rs. 23,569 cr the near to medium term.
52-week high/low: Rs. 678/320 Key positives

NSE volume: (No of

ŠŠ Revenue for Q3FY20 exceeded expectations, growing by ~33%
shares)
2.0 lakh y-o-y to Rs. 869.7 crore backed by better festive sales and consistent
SSSG.
BSE code: 500251 ŠŠ SSSG for Westside have been consistent over the quarters, at ~10%
for Q3FY2020 and 12% for 9MFY2020.
NSE code: TRENT
ŠŠ In spite of a decline in gross margins, operating efficiencies drove
Sharekhan code: TRENT
up comparable OPM by ~130 BPS to 12.4%.
Key negatives
Free float: (No of
22.4 cr ŠŠ Higher discounts and an unfavourable revenue mix resulted in
shares)
gross margin decline of 240 BPS to 50.6%.
ŠŠ Impact of Ind AS 116 stood at Rs. 8.7 crore for the quarter.
Shareholding (%)
Our Call
Promoters 37.0 Maintain Positive view with 16-18% upside: We have increased our
earnings estimates for FY2020 to factor in better than expected
FII 21.5 operating performance in Q3FY2020. Trent has adopted the new tax
regime in Q3 and accordingly, will be paying tax at the rate of 25.2%
DII 15.9 from FY2021 as against earlier rate of 33%. We have thus increased our
earnings estimates for FY2021 and FY2022 to factor earnings accretion
Others 25.6
due to lower tax rate. Trent is well poised to achieve revenue and
earnings CAGR of 23.6% and 42.8%, respectively, over FY2019-22. The
stock is currently trading at 27.5x its FY2021E and 24.1x its FY2022E
Price chart EV/EBITDA (post Ind AS 116 adjustments). We maintain our Positive view
660 on the stock with 16-18% upside from current levels.
600
540 Key Risks
480
420 Any slowdown in the discretionary demand environment would affect
360 SSSG and would, thus, be a threat to revenue growth.
300
Feb-19

Feb-20
Jun-19

Oct-19

Valuation (Standalone) Rs cr
Particulars FY18 FY19 FY20E* FY21E* FY22E*
Revenue 2,066 2,532 3,284 4,026 4,769
Price performance OPM (%) 9.9 9.5 18.5 18.6 18.7
Adjusted PAT 117 128 173 272 372
(%) 1m 3m 6m 12m
Adjusted diluted EPS (Rs.) 3.3 3.6 4.9 7.6 10.5
Absolute 10.9 8.5 34.1 69.1 P/E (x) 201.9 184.2 136.3 86.7 63.3
P/B (x) 13.6 13.0 9.4 8.6 7.8
Relative to EV/EBIDTA (x) 88.1 83.1 32.8 27.5 24.1
15.3 9.3 24.5 52.9 RoNW (%) 7.4 7.7 8.2 10.4 12.9
Sensex
RoCE (%) 10.2 11.0 14.6 12.6 14.8
Sharekhan Research, Bloomberg
Source: Company; Sharekhan estimates *estimates include the impact of Ind AS 116

February 07, 2020 46

 Viewpoint
Strong performance in Q3FY2020 driven by 10%: Revenue grew by ~33% y-o-y in Q3FY2020 to Rs. 869.7
crore from Rs. 656.5 crore in Q3FY2019 driven by ~10%, SSSG came in at 12% for 9MFY2020. Higher discounts
and a change in revenue mix led GPM to decline by 240 BPS to 50.6%. However, operating efficiencies
drove up comparable OPM by ~130 BPS to 12.4%. Reported OPM increased significantly to 20% due to the
implementation of Ind AS 116 and reported operating profit grew to Rs. 173.5 crore. Other income registered
a considerable rise to Rs. 38.2 crore. Despite higher finance costs and depreciation due to Ind AS 116, profit
before tax (PBT) grew by 53.5% y-o-y to Rs. 94.6 crore. Reported PAT grew by 38.4% y-o-y to Rs. 55.7 crore
in Q3FY2020 from Rs. 40.3 crore in Q3FY2019. The net impact on Ind AS 116 stood at Rs. 8.74 crore for the
quarter.

Result Snapshot (Standalone) Rs cr

Particulars Q3FY20 Q3FY19 Y-o-Y (%) Q2FY20 Q-o-Q (%)
Net revenue 869.7 656.5 32.5 818.0 6.3
Cost of goods sold 429.4 308.3 39.3 426.7 0.6
Gross profit 440.3 348.2 26.5 391.3 12.5
Staff cost 80.5 65.5 23.0 82.6 -2.6
Rent expenses 58.6 82.5 -29.0 54.4 7.8
Other expenses 127.7 127.6 0.1 121.4 5.2
Operating profit 173.5 72.6 139.0 132.8 30.7
Other income 38.2 9.4 - 43.3 -11.6
Interest 59.3 8.8 - 59.8 -0.9
Depreciation 57.9 11.6 - 58.5 -1.0
Profit before tax 94.6 61.7 53.5 57.8 63.8
Tax 38.9 21.4 81.9 19.5 99.4
Reported PAT 55.7 40.3 38.4 38.3 45.6
EPS (Rs.) 1.6 1.2 29.3 1.1 45.6
BPS BPS
GPM (%) 50.6 53.0 -240 47.8 280
OPM (%) 20.0 11.1 889 16.2 372
Source: Company; Sharekhan Research

February 07, 2020 47

 Viewpoint
Outlook
Trent has reported strong performance in 9MFY2020 with revenue and reported PAT growing by 32%
and 26%, respectively, driven by consistent SSSG, store expansion and strong traction of private brands.
Westside grew by 22% in 9MFY2020 with a SSSG of 12%. We expect the SSSG trajectory to sustain backed
by improving store fundamentals. Almost 100% share of private labels will help the company improve its
supply chain and maintain its OPM expansion momentum. We expect the OPM to stand at ~18.5% for FY2020,
after considering the adjustments for Ind AS 116. Aggressive store expansion in Westside, scale up of Zudio
and higher investments in the brand will help the company maintain its operating performance in the coming
quarters.
Valuation
We have increased our earnings estimates for FY2020 to factor in better than expected operating performance
in Q3FY2020. Trent has adopted the new tax regime in Q3 and accordingly, will be paying tax at the rate of
25.2% from FY2021 as against earlier rate of 33%. We have thus increased our earnings estimates for FY2021
and FY2022 to factor earnings accretion due to lower tax rate. Trent is well poised to achieve revenue and
earnings CAGR of 23.6% and 42.8%, respectively, over FY2019-22. The stock is currently trading at 27.5x its
FY2021E and 24.1x its FY2022E EV/EBITDA (post Ind AS 116 adjustments). We maintain our Positive view on
the stock with 16-18% upside from current levels.

One year forward EV/EBITDA (x) chart

700 35x
650
600 30x
550
500 25x
450
400 20x
350
300
250
200
150
100
50
0
Aug-14

Aug-18
Apr-18
Jan-16

Jan-19
Jul-17
Sep-15

Sep-19

Feb-20
Nov-17
Jun-16
May-15

May-19
Dec-14
Mar-14

Mar-17
Oct-16

Source: Sharekhan Research

Peer Comparison (Standalone)

P/E (x) EV/EBIDTA (x) RoCE (%)
Companies
FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E
Shoppers Stop 37.4 75.7 99.2 12.8 6.5 6.1 10.5 9.6 7.6
Future Lifestyle Fashions 42.5 49.6 25.8 16.0 9.0 6.9 9.5 9.4 11.2
Trent 184.2 136.3 86.7 83.1 32.8 27.5 11.0 14.6 12.6
Source: Company, Sharekhan estimates

February 07, 2020 48

 Viewpoint
About company
Trent is a leading branded retail company that operates Westside, a chain of departmental stores retailing
apparel, footwear and other accessories, with over 99% contribution from own brands. Westside has presence
of over 150 stores across 76 cities in India. It also operates value fashion chain Zudio, having 40 stores and
books and music retail chain Landmark with five stores. Trent has a 50:50 JV with Tesco PLC UK to operate
Star stores through Trent Hypermarket Private Limited. In addition, Trent has also two separate associations
of 49% each with the Inditex Group of Spain to operate Zara and Massimo Dutti stores in India through Inditex
Trent Retail India Private Limited.
Retail format JV/Association
Westside Owned by Trent
Zudio Owned by Trent
Star 50:50 JV with Tesco PLC UK
Zara 49% association with Inditex group
Massimo Dutti 49% association with Inditex group
Source: Company Website

Investment theme
Trent is the only branded retail player with close to 100% share of private brands with pan-India presence.
Trent offers a strong set of brands catering to all categories of consumers, which has helped the company
report the highest average revenue per square foot compared to other branded players. Trent has maintained
its SSSG momentum over the years as well as the profitability is seen increasing y-o-y. Aggressive store
expansion, better store fundamentals, higher contribution from private brands and innovative product offering
in the premium and value fashion space would be key growth drivers for the company going ahead.

Key Risks
ŠŠ Any slowdown in the discretionary demand environment would impact SSSG, affecting revenue growth.
ŠŠ Heightened competition, especially in the form of private labels by other branded players, would act as
a threat to revenue growth.
ŠŠ Any significant increase in key raw-material prices such as cotton would affect the company’s profitability.

Additional Data
Key management personnel
Noel Tata Chairman
Philip N Auld Managing Director
P Venkatesalu Executive Director & CFO
Mehernosh Surti Company Secretary
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Arisaig India Fund Limited 7.6
2 Dodona Holdings Ltd 4.7
3 HDFC Asset Management Co Ltd 4.2
4 PRAZIM TRADING & INV CO 2.6
5 Derive Trading Pvt Ltd 2.6
6 Amansa Holdings Pvt Ltd 2.5
7 Sundaram Asset Management Co Ltd 2
8 Franklin Resources Inc 1.8
9 L&T Mutual Fund Trustee Ltd 1.8
10 SBI Life Insurance Co Ltd 1.6
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 07, 2020 49

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