Trent Ltd., the prominent retail arm of the Tata Group, is poised to announce its first-quarter results for the June quarter today. Market analysts largely foresee a modest, flattish net profit for the period, despite projections of robust sales growth, primarily driven by aggressive store expansion.
Key Financial Projections
Consensus estimates point towards approximately 19% year-on-year (YoY) growth in net sales. Axis Securities, for instance, projects net sales to reach Rs 5,690 crore, a 19% increase from the previous year's Rs 4,781 crore. HDFC Securities aligns with this trend, estimating 19% growth for Westside and 18% YoY growth for Zudio formats.
However, the outlook for net profit is more subdued. Axis Securities forecasts a marginal 0.4% YoY rise to Rs 424 crore, while Nuvama anticipates a slight 1.3% degrowth in standalone net profit to Rs 417 crore. This discrepancy highlights the expected pressures on profitability despite top-line expansion.
Margin Compression Expected
EBITDA margins are a key area of concern for analysts. Axis Securities predicts an 88 basis points YoY decline, bringing EBITDA margins down to 16.6%. This expected compression is attributed to several factors, including:
- Supply-side inflation
- Rising crude derivatives costs
- Aggressive scaling of the lower-margin Star Bazaar format
Nuvama analysts echo these concerns, pointing to higher costs associated with new leases and slower productivity impacting margins. They also note that most cost optimizations are already factored into the base, limiting further improvements, and anticipate some pressure from raw material inflation.
HDFC Securities, however, projects a flat gross margin at 45.1% YoY, suggesting that the higher contribution from Westside might be offset by crude-linked material inflation. Kotak Institutional Equities also expects gross margin to remain flat YoY.
Growth Drivers and Challenges
Sales growth is primarily propelled by Trent's rapid store expansion strategy, particularly in Tier 2 and Tier 3 cities. Kotak Institutional Equities highlights around 10 new Zudio store additions sequentially. However, this expansion also presents challenges:
Cannibalization: New stores may partially offset revenues from older, existing stores.
Revenue Per Square Foot: Kotak expects revenue growth to lag area growth, with a potential 7% YoY decline in revenue per square foot.
Despite these headwinds, Kotak suggests that operating leverage in other operating costs could lead to YoY EBITDA margin expansion, even with weak same-store sales growth (SSSG).
Analyst Sentiment and Target Price
The overall sentiment among analysts remains positive, with a strong majority recommending a 'Buy' rating. Trent currently has 20 'Buy' calls, five 'Hold' recommendations, and two 'Sell' ratings. The consensus target price stands at Rs 3,218, implying a modest upside from current levels.