Buy This Tata Stock For 29% Growth, Pursuing Aggressive Growth, Company Aims 25% Annual Revenue Growth

Motilal Oswal Financial Services, a reputed brokerage firm, in its report on Trent Ltd, a Tata Group company has recommended investors buy the stock of the company for an estimated target price of Rs 1,430/share. The company runs multiple stores under the different brand names in fashion, retail, and others sectors.

Stock Overview - CMP, Target Price, Returns, 52 Week Low & High

The Current Market Price (CMP) of Trend is Rs 1,113.30/share. The stock last week gave a negative return of 1.51%. The decline was only for the last week. The stock has give positive returns in last 1 month 27.82% in 1 year, 179.58% returns in 3 year and 338.65% returns in 5-years.

It has touched the 52-week low level at Rs 828.95/share on 17 June 2021, and the 52-week high level at 1,346.85/share this year on 7 April. The Current Market Price of the company is Rs 284.35 above its 52 week low level and Rs 233.55 above its 52 week high level.

According to the brokerage's estimated target price of Rs 1,430/share and the Current Share Price of Rs 1,113.30/share, the stock has the potential to jump 29% in 12 months investment horizon.

Trent's successful store performance, healthy store economics, and aggressive growth strategy offer a huge runway for growth over the next three-to-five years, as the company targets 25% annual revenue growth.

 

Growth at all cost supported by strong brand and revenue

Despite the adverse impact of COVID-19 over the last two years, Trent's standalone revenue/PAT reported an encouraging CAGR of 11%/27% over FY20 to reach Rs 39b/Rs 2.5b, respectively, which was by far the best among peers. However, due to the increased losses in its subsidiary (Booker India), Trent's consolidated PAT (post-minority interest) contracted to Rs 346m in FY22 from Rs 1.0b in FY20. Consolidated EBITDA (Pre IND-AS 116) posted a 7% CAGR to Rs 2.3b over FY20-22. Trent's standalone revenue growth was fueled by Zudio's stellar performance (topline up >2x to Rs 11b), well supported by Westside that matched its FY20 revenue of Rs 27.3b. This was backed by cumulative store additions of 170/40 by Zudio/Westside over the last two years, (191%/21% addition), respectively.

ROIC depressed due to investments; Westside garners healthy returns

Trent's consolidated RoE/RoIC stood at ~2% in FY22 v/s 8% in FY20. The return ratios were weak mainly due to: a) low earnings, adversely impacted by COVID19, b) investments made in loss-making JV and subsidiaries viz., Trent Hypermarket (Star Bazaar) and Booker India and c) liquid investments. Excluding investments, standalone RoIC (post-tax) was at ~8% in FY22. However, the flagship (Westside)'s ROIC that stood at ~20% in FY20 (negative in FY21), now stands ~10% (post-tax). This was due to 20% lower revenue/sqft v/s >Rs 10,000 historically. Zudio turned EBITDA breakeven in FY22 but saw -1% ROIC, while Star Bazaar - the capital guzzler - posted -25% ROIC.

Healthy leverage; cashflows utilized to fuel growth

Trent operates on a strong consolidated net cash position of Rs 2.5b, despite the aggressive store additions over the last few years. It utilized the internal accruals along with the Rs 9b promoter funding received in FY20. In FY22, Trent's consolidated operating cashflows were muted at Rs 2.2b v/s Rs 4.4b in FY20, as inventory days increased to 70. This could be attributed to the aggressive 65% area addition over FY20 as inventory/sqft has come down by 15%. Capex was at Rs 2.1b, ~20% lower than our working, due to the capital-efficient FOCO model, which led to negative FCF of Rs 1.5b v/s positive cash flow of Rs 2.4b in FY20. Investments of Rs 1.1b in JVs/subsidiaries (Star Bazaar and Booker) diluted the cashflows with no clear understanding on the end game.

Zudio & Utsa

Revenue from Zudio has more than doubled to Rs 11b in FY22 from Rs 4.8b in FY20, despite the adverse impact of the pandemic. The same should grow 3x over the next two years to Rs 33b. Our channel checks suggest that the six-month-old Zudio stores are garnering an annualized revenue run-rate of Rs 100m, i.e. Rs 14- 15k/sq. ft., nearly 20-30% more than stores of similar size.

The brokerage said, "We understand that the company is aggressively vying for 200 store additions in FY23E. Further, Utsa that caters to Women ethnic wear now has six stores and remains another growth driver for the company."

Growth levers in place, which warrants a premium valuation, Suggests Buy

"We expect 37% revenue growth over FY22-24, which warrants a premium valuation for the stock. We have ascribed a 31x FY24E EV/EBITDA to the standalone business (Westside and Zudio, 15% premium for the last five years until the pandemic and 10% premium to our Retail coverage universe), 1x EV/sales to Star Bazaar, and 15x EV/EBITDA to Zara to arrive at our new Target Price of Rs 1,430. Weak demand in the tier 2-3 cities as validated by our channel checks remains the key near-term risk," the brokerage has said.

About - Trent Ltd

Established in 1998, Trent Ltd is a part of the Tata group. The company is engaged in retailing of apparels, footwear, accessories, toys, games, food, grocery & non-food products through various of its retail formats/ concepts. Trent Ltd is headquartered in Mumbai but has pan-India operations. Trent is one of the leading players in the branded retail industry in India. The company primarily operates stores across four formats, which include, Westside with 174 Westside stores spread across 90 cities, Zudio with 133 Zudio stores spread across 57 cities, and other two stores namely Star, and Landmark. Star is fresh food and grocery retail chain, with 60 stores spread across 7 cities. Landmark is a family entertainment concept, operates through six independent stores and is retailed through select Westside locations. The company has a market cap of Rs 39,576 crore.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal Financial Services. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.