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Consumer Discretionary 4QFY21 Results Preview - Bargains few and far between - HDFC Securities

Posted On: 2021-04-17 03:25:22 (Time Zone: UTC)


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

All discretionary categories hit growth; devil lies in nuances: Our discretionary universe is expected to clock 27/48% revenue/EBITDA growth YoY (on a low base) in 4QFY21 as increased consumer mobility/pent-up demand in metros/Tier 1 cities helped OOH categories such as jewellery/apparel and paints. On a two-year basis, F&G (ex-RR)/jewellery/paints/apparel (ex-RR) are expected to deliver 20/24/11/-3% CAGR. However, devil lies in nuances, especially for apparel retail. Growth over two years has come at the cost of deteriorating unit economics as (1) reliance on online channel continues to increase (pricing power could get compromised with time) and (2) footfalls/store have consistently reduced.

Jewellery - strong wedding demand + declining gold prices aid fresh purchases: Strong wedding demand and declining gold prices are likely to aid fresh purchases in 4Q. Bullion sales (low GM product) are likely to be higher in mix YoY. This, coupled with lower studed ratio, are likely to weigh in on margins. Most big-box jewellers are expected to grow by 50-70% in 4Q (channel checks). Note: ~20% of Tanishq stores reside in Maharashtra and Delhi, which could dampen footfalls in the forthcoming quarter.

Grocery growth encouraging, albeit margin quality remains weak: Grocers continue to improve upon their growth rates in 4QFY21, although this has taken more stores to accomplish, while footfalls remain relatively weak Gross margins are expected to remain healthy YoY. However, it will likely be backed by lower staples discounting. Non-essentials' sales remain weak.

Apparel - not out of the woods yet: Near full-recovery in apparel (ex-RR) is encouraging. However, recovery still remains over-reliant on online platforms and profitability still hinges on rental/other cost savings. Ticket sizes remain elevated, while footfalls are yet to impress. In this backdrop, a second lockdown in major cities could particularly be punitive for apparel retailers, especially the ones with weaker balance sheets.

Paints to clock 35% growth: Paint firms are expected to continue their strong show in 4Q as metro sales pick up meaningfully. Rural demand continues to remain healthy. Revenues of Top-3 are expected to grow by ~35%, underpinned by 38-41% volume growth. RM spikes are likely to weigh on gross margins. However, cost controls will cushion EBITDAM.

Bargains few and far between: Essentials and 'only deferred, not denied' categories such as F&G, paints and jewellery have done well. Alas, bargains here are few and far between (these spaces trade at 58-75x FY23 P/E). In apparel, we prefer VMART (ADD) and ABFRL (BUY). Upgrades: Asian Paints (From SELL to REDUCE).


Source: Equity Bulls

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