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Buy Trent, target Rs 500: Motilal Oswal Securities

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Motilal Oswal Securities has given a buy recommendation on Trent with a target price of Rs 500. Shares of Trent traded at Rs 443.2 around 10 am on 11 July, 2019.

The brokerage has set a one-year horizon for the stock to hit the target price.

Investment rationale-Eying strong growth Westside is a well-oiled business format with a right product proposition, pricing and favorable store economics.

It now plans to replicate Westside’s success in Zudio, which will have competitive pricing and value products targeted at the youth.

This should drive healthy footfalls and conversions.

Against this promising backdrop, the company targets to double its store count potentially in three years (adding 60 stores).

Subsequently, we have revised our store addition estimate for Westside and Zudio to 35 and 40 annually against 23 and 25 earlier, respectively. Setting the base for growth Keeping in mind its ambitious plans and accelerated growth, the company has announced equity fund raising plans of Rs 1,550 crore in end-June.

The proceeds will largely be used to expand its capabilities, including setting up of backend systems (warehouse and automation), digitization of stores and processes to support pace of store adds and store addition along with select buy-outs of old stores.

At the same time, the proceeds will also ensure Trent remains a net cash company. Return on investment to improve over next three years According to our calculations, Westside garners mid-teens RoCE, but the upcoming investments in scaling up both Westside and Zudio may keep the return profile in single digits.

"We have revised our cumulative capex estimate by 3.4 times to Rs 1040 crore over FY19-21.

Further, we expect RoIC to languish at nearly 10 per cent in FY20E, but believe it will recover to healthy mid-teens level over the next 2-3 years on Zudio driving scale benefits, accelerated store addition and backend synergies.

Over FY19-21, we expect revenue, Ebitda, PAT CAGR of 23 per cent, 27 per cent and 60 per cent, respectively," said the brokerage. Valuation and view As per the brokerage, Trent is likely to face near-term impact of equity dilution on earnings growth and RoIC.

However, over a three-year period, the dilution could drive accelerated growth, which, in the brokerage's view, is not fully captured in valuations as of now.

Implied EV and Ebitda and P/E remain rich at 39 times and 58 times, respectively, on FY21E.

"We raise our SOTP-based target price to Rs 500, against Rs 440 earlier, valuing Westside and Zara at 26 times EV/Ebitda and Star at 1 time EV/sales on Sep’21E," said the brokerage.

Westside and Zara are valued at a 30 per cent premium to industry average.

The implied target price is at par with the three-year average.




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