In the June quarter earnings (Q1FY24), retail companies have reported mixed performance, with premium retailers sustaining their growth momentum, brokerage house Axis Securities stated in a results review report. Moreover, value retailers have shown initial signs of recovery, added the brokerage.
Going ahead, it believes that full rural recovery will take a few more months. Also, companies have highlighted that rural growth is likely to pick up gradually, with faster growth expected in H2FY24.
Axis Securities noted that in Q1, EBITDA margins have witnessed pressure on account of negative operating leverage due to subdued topline performance.
Moving ahead, Axis highlighted that a strong festive and wedding season combined with a rural recovery led by higher government spending and increased remittances from urban areas will determine future growth momentum in the rural region. However, the impact of the El Nino event will need to be closely monitored, it added.
It also pointed out that most companies in its coverage universe have targeted strong store opening guidance as they move into smaller towns and most new store openings are expected to occur ahead of the festive season in Q2-Q3FY24.
What Makes the Retail Sector a Good Bet? Axis Answers:
1) Rapid formalisation undergoing – The Indian retail market is largely unorganised with large-scale opportunities in smaller cities and towns. With increasing disposable income, consumers are opting for branded products.
2) Smaller cities provide huge headroom – Smaller cities and towns are growing faster than metros across categories – Apparel, QSR, Footwear, etc. as these cities and towns have higher aspirations for branded products and an increase in disposable income is further aiding this growth.
3) Structural Story to Continue -
Higher disposable income: Average per-capita income in India is $2,200 and any increase in per-capita income will reflect in higher spending as per-capita expense on essential goods remains constant.
Increased participation of women in the workforce: Higher disposable income is resulting in higher sales of overall women's wear.
Top sector ideas
Trent: The brokerage has a ‘buy’ call on the stock with a target price of ₹2,000. However, one must note that this target has already been achieved by the stock.
"The stock has reached its Q1FY24 result update target price. However, we remain positive on the stock in the longer term and recommend BUY on dips as we expect strong revenue growth in the coming quarters as well. This will be achieved by Trent's focus on rapid store expansion and continued assortment renewal, which will lead to higher overall footfall. In addition, the improvement in the earnings profile across all formats, the reduction in losses at Star Bazaar, and the improvement in traction at Inditex JV are also positive signs for the company," said the brokerage.
Relaxo: The brokerage has a ‘buy’ call on the stock with a target price of ₹1,050, implying an upside of 13 percent.
"We believe the worst is past the company as – a) Demand environment is likely to recover in FY24, especially in rural India, 2) Raw material prices are now stable, which will help expand gross margins, 3) The company is regaining its lost market share from unorganised players, 4) It is focusing on premiumization by increasing the share of the fast-growing sports and athleisure category, and 5) The company is doubling its Sparx capacity in Bhiwadi (Rajasthan)
from the current 50,000 pairs/day to 100,000 pairs/day, which we believe is a step in the right direction in the long term," it explained.
Westlife Foodworld: The brokerage has a ‘buy’ call on the stock with a target price of ₹1,040, indicating a 16 percent potential upside.
"We maintain our positive outlook on WLDL. Our confidence in the company’s strong future prospects is supported by its strong execution track record of Revenue/EBITDA growth of 17 percent/51 percent over FY16-20. This was driven by new product launches and cost rationalization programs. We expect the company to deliver healthy Revenue/EBITDA growth of 28 percent/43 percent CAGR over FY22-25E through – (a) Developing and expanding fast-growing categories such as McDelivery, McCafe, McBreakfast and Fried Chicken, (b) Leveraging McDelivery and other convenience platforms to capitalize on the fast-growing delivery channel; and (c) Management’s ambitions to penetrate fast-growing smaller cities, raising store guidance to 40-45 stores/year from 25-30 stores previously, and transform regular stores into tech-savvy Experience of the Future (EOTF) stores for a better customer experience," explained the brokerage.
