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Consumer Discretionary Companies - Q3FY21 Results Preview Report - HDFC Securities

Posted On: 2021-01-13 23:17:00 (Time Zone: Arizona, USA)

Ms. Jay Gandhi, Institutional Research Analyst, HDFC Securities

Ex-apparel - all categories pivot to growth: Ex-apparel, all consumer discretionary categories are likely to pivot from recovery to growth phase. Our universe is expected to deliver 9% YoY growth. We expect 15% agg. growth (ex-Apparel). While Apparel lags the discretionary pack, recovery remains encouraging, with most hitting 70-80% of base quarter sales. Ticket sizes, though normalising remain elevated from pre-COVID levels; ergo footfall recovery yet has some catching up to do. Losses are ebbing for apparel retailers, but this improvement continues to hinge on multiple crutches - 1. Over-reliance on online platforms and rental concessions.

Pent-up wedding demand + stable gold prices to aid fresh purchases: Pent-up wedding demand and stable gold prices is likely to aid fresh purchases. Value growth continues to lag volume growth courtesy elevated gold prices (+30%). Most big-box jewellers' sales are expected to grow by 5 to 15% in 3Q (channel checks). Assessing ex-pent up demand remains key. Revenue pick-up and costrationalisation to ensure margins hit near pre-COVID levels.

Grocery to hit growth too; albeit margin quality remains weak: Grocers are expected to hit growth in 3Q. Margins are expected to mean-revert YoY. However, its underpinnings remain weak. GM improvement is likely to be backed by lower staples discounting. Non-essentials' sales remain weak.

Apparel - not out of the woods yet: Recovery in apparel (70-80%) is encouraging. However, it still remains over-reliant on online platforms and profitability still hinges on rental concessions. While losses will ebb QoQ due to higher operational days, the trajectory of rental savings could come off directionally, and footfalls are yet to materially impress.

Paints to clock 15% growth: Paint firms are likely to continue their volume first strategy by focusing on the less-impacted tier 3/4 cities & low-end paint solutions. However, Metro sales too are picking up. Revenues of Top-3 are expected to grow by ~15% underpinned by 20%+ volume growth. Margins are likely to improve by 250-300bp courtesy GM expansion.

No margin of safety: While marquee names have exhibited business recovery, quality of growth / profitability is yet to be tested, especially in Retail (Still underpinned by pent up demand + stock up behaviour + rental concessions; footfalls/store has some catching up to do). However, the recent run-up in stock performance seems to suggest we already have hit secular growth/profit gain phase. Ergo, no margin of safety.

Downgrades: Asian Paints, Titan (Reduce to Sell).

Source: Equity Bulls

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