Consumer Discretionary - 1QFY22 Results Preview Report - Value-price dislocation widens - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities and Mr. Varun Lohchab, Institutional Research Analyst, HDFC Securities

Discretionary categories hit by the second wave: Our discretionary universe is expected to clock 42%/~5x revenue/EBITDA growth YoY (on a low base) in 1QFY22. The underlying demand continues to remain impacted by the second wave of the pandemic (two-year revenue/EBITDA CAGRs of -10/-29%). F&G, jewellery, paints and apparel are expected to clock 5%, -23%, -5%, and -39% (2-yr CAGR). Ticket sizes in retail, though normalising, remain elevated from the pre-COVID levels; footfalls are still far from full recovery.

Margins to remain sub-optimal: In 1Q, GMs for most discretionary categories are expected to remain under pressure vs. typical run-rates, given (1) raw material inflation, (2) inferior revenue mix, and (3) inventory write-offs (in case of apparel retailers). EBITDAM is expected to improve YoY, given a favorable operating leverage, but is likely to be sup-optimal vis-à-vis steady state margins (ex-paints) in 1Q.

Store/dealer additions hit pause: Store/dealer additions for retail/paint companies are likely to be soft, given that construction activity had hit pause during the second wave.

Channel checks: Our value chain checks suggest that (1) in F&G, international e-tailers and Reliance Retail have been improving their assortment availability and pricing mechanisms. Hence, competitive intensity would be a key monitorable for strong offline incumbents; (2) the quantum of rental concessions/waivers given by landlords in FY21 to apparel retailers has meaningfully dropped. This remains a huge risk to margins in FY22, if footfalls don't oblige. Against this backdrop, a third wave could particularly be punitive for apparel retailers, especially the ones with weaker balance sheets; (3) for paint companies, rural demand continues to be strong, while metros/tier 1 cities continue to take a hit (albeit the hit is less intense than that in the base quarter).

Value-price dislocation widens: While our revenue/EBITDA growth expectations over FY19-24 and steady-state return profiles have not changed meaningfully, the dislocation between value and price within the discretionary pack has never been this wide, post the recent run-up in respective stock performances (the space is currently trading at 50-80x Jun-23 P/Es). Downgrades: Asian Paints (from REDUCE to SELL) and V-MART (from REDUCE to SELL). Note: TP changes largely mimic (1) DCF rollover to Jun-23 and (2) marginal increase in FY23 estimates to account for lower-than-expected cost structures.

Source : Equity Bulls

Keywords