ICICI Direct is bullish on Trent has recommended buy rating on the stock with a target price of Rs 560 in its research report dated May 25, 2020.
ICICI Direct's research report on Trent
The Covid-19 pandemic had an unprecedented impact on retail industry, forcing temporary closure of physical stores from mid-March onwards in India. The same materially impacted Trent’s performance in Q4FY20. In the apparel space, Trent has been a consistent outperformer with robust revenue growth (30%+ growth in previous three quarters). However, the revenue trajectory got de-railed significantly in Q4FY20. Standalone revenues (including Westside, Zudio formats) grew 8.1% YoY to Rs 722.8 crore in Q4FY20. The management highlighted that for January-February, revenue grew a robust 33% YoY. Revenue growth was supported by healthy SSSG for Westside (in January-February) & exceptional ramp up in Zudio brand. Gross margins for the quarter fell 98 bps YoY to 46.5% due to a rise in share of revenue from Zudio format that has a lower margin profile. Negative operating leverage further dented margins. As per our calculations, EBITDA margins (adjusting for Ind-AS 116) fell 180 bps YoY to ~3.0%. EBIT fell 90% YoY to Rs 2.1 crore in Q4FY20. Food & grocery stores (Star Bazaar, 50% JV) continued to operate in March. The management indicated that 70 fashion stores (~28%) resumed operations post relaxation in certain states.
Outlook
The company has a healthy liquidity position with cash & current investments of ~Rs 840 crore (D/E: 0.1x) as on FY20. Net working capital cycle remained efficient at ~10% of revenues in FY20. We expect store addition momentum to decelerate in FY21E, as it focuses on maintaining liquidity to tide over uncertainties. Westside continues to be one of the most successful and established franchises (97% private label brands). Healthy performance in a challenging scenario instils confidence in the business model. Furthermore, being a net cash positive company, it would be in a better position to tide over current turbulent scenario. We maintain BUY with target price of Rs 560 based on SOTP valuation.
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