PremiumOverall margins are expected to be impacted as Trent focuses on store expansion. Strong revenue growth is driving earnings upgrades for the stock, but valuations are a turn off
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Shares of Trent Ltd. surged to a new 52-week high of ₹1,365 apiece on Friday on the National Stock Exchange. The company continues to improve on revenue growth, driven by Trent’s flagship concept stores - Westside and Zudio. In Q1FY23, operating revenue rose 39.5% sequentially to ₹1,653 crore, which is about 115% higher versus pre-covid levels (Q1FY20).
Note that Q1FY23 was the first normal quarter in the past three years and as such, pent-up demand is likely to have played out. On a three-year compound annual growth rate basis, overall revenue growth stood at 29%.
But the good news ends here. The company failed to translate the revenue growth momentum to margin.
Trent’s Q1 gross margin at 49.3% was roughly flat sequentially and down 370 basis points versus Q1FY20. One basis point is 0.01%. Also, an increase in staff cost and other expenses meant Ebitda (earnings before interest, tax, depreciation and amortization) margin at 18.4% was below Q1FY20 levels and the measure also missed analysts’ estimates.
Note that overall margins are expected to be impacted as Trent focuses on store expansion. The company currently has a portfolio of over 450 fashion stores.
“While faster growth in Zudio would have diluted the margins, Westside margins have also seen a sharp decline as intensity in discounting and promotions returned, in our view," said analysts at Jefferies India in a report on 11 August.
Meanwhile, investors seem to be capturing optimism adequately as shares have risen 27% so far in calendar year 2022, significantly ahead of about 1% appreciation in the Nifty500 index over the same period.
Strong revenue growth is driving earnings upgrades for the stock, but valuations are a turn off. Analysts at IDBI Capital Markets & Securities Ltd have revised their FY23-24 earnings per share estimate upward by 5-7% driven by higher-than-expected outperformance in revenue, but due to expensive valuation the domestic brokerage house maintains a sell rating on the stock.