Home / Markets / Mark To Market /  Trent’s recovery in Q4 to be cut short by new covid wave

Shares of retailer Trent Ltd have declined by about 16% from its 52-week high on the NSE. That’s hardly surprising considering that the second covid wave is expected to stall its recovery. Localized lockdowns and restrictions across several states are expected to keep Trent’s near-term outlook weak.

“This would weigh on FY22 revenues/margins, leading to a 48% cut in FY22 Ebitda (minimal change in FY23); we expect heightened volatility over the next few months or quarters," said analysts from Jefferies India Pvt. Ltd in a report on 1 May. Ebitda is earnings before interest, tax, depreciation and amortization.

This comes at a time when Trent’s recovery was progressing consistently every quarter after business operations were hit in 2020 owing to the lockdown. In fact, standalone revenue increased by 7% year-on-year (y-o-y) to 774 crore. Note that revenue has grown after three continuous quarters of decline. The company had benefited from the considerable easing of covid-related restrictions during the initial months of Q4.

The online channel saw 150% y-o-y revenue growth during the quarter. Further, Westside revenues were broadly at last year’s levels (96% of the corresponding quarter on a like-for-like basis). Westside is Trent’s flagship chain of stores and accounts for a big chunk of its overall revenues. Even so, the company has seen a sharp drop in revenues following the curbs starting mid-March.

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Satish Kumar/Mint

Overall, Trent’s gross profit margins have expanded as much as 671 basis points y-o-y to 53.1%. One basis point is one-hundredth of a percentage point. Pre-tax earnings rose sharply helped by strong growth in other income, which included 12 crore towards rental adjustments.

Trent ended FY21 with 174 Westside and 133 Zudio stores. Zudio comprises Trent’s value fashion business. An additional 19 Westside and 15 Zudio stores will open after curbs are eased or approvals are in place.

To be sure, Trent’s shares have remained indifferent to its strong Q4 results. One hitch for investors is that the valuations of the stock are already rich. “Trent’s superior execution and healthy balance sheet warrant premium valuations, but it already trades at rich valuations of 34 times EV/Ebitda on FY23E estimates, leaving limited upside for the stock," said Motilal Oswal Financial Services Ltd analysts. The broker’s target price for the stock is roughly 10% lower than the prevailing market price.

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