The Retail (Corona)ge! - Q4FY20 Result Preview: Retail - HDFC Securities

Impact of Covid-19 and FY21 template: Retail is likely to be among the worst hit sectors by COVID-19. Revenue declines across coverage is likely to range between 3-14% in 4Q. Impact on profitability (EBITDA) will be even higher (-14% to severe losses in FY21 ex-DMART) given the high fixed cost base in biz models. In this backdrop, Assessing 1. Foregone vs recoverable revenue, 2. Inventory fungibility/quality across seasons, 3. Capital to cover fixed costs and 4. Leverage position will assume centre stage.

Jewellery- Volume problems exacerbate: Jewellery volumes which were already under pressure (Pre-COVID-19) courtesy elevated gold prices (up 22% YoY), are likely to decline further in 4Q as store closures during the nation-wide lockdown mar wedding-based sales. Most big-box jewellers' sales are expected to decline by -5 to -15% in 4Q (Channel checks). While the category scores on inventory fungibility (Gold can be recycled without material value loss); the wafer-thin capital cover, higher fixed cost base (as most on lease model) and precarious leverage position for some big-box jewelers, may expedite the market share gain narrative for category leader - Titan, in the event of an extended lockdown/it's after-effects.

'Essentials only mandate'- Sales friendly, but margin-dilutive for grocers: The lockdown is likely to bump up sales velocity across grocers in 4Q, as consumers hoard on essentials. However, these categories are typically margin dilutive. Note, supply chain and manpower disruptions may impact service levels, ergo, sales too in 1QFY21. Over-leveraged grocers with higher mall-based presence are expected to witness significant footfalls cuts, ergo profitability cuts as consumers restrict travel beyond residential catchments.

Apparel- Realizations may remain weak as Full-price month washed out: With March (Full Price sale month) washed out, realizations are expected to be weak for most apparel retailers. Retailers who score on inventory fungibility, capital cover and leverage position are Trent and V-MART. TCNS falls short on inventory fungibility and ABFRL, STOP seem the weakest on all of the above (captured in stock performance). Note: If online sales of non-essentials are permitted from 20th Apr - ABFRL and TCNS may be able liquidate inventory and salvage realizations/footfall loss partly.

Extended lockdown drives estimates/TP downgrades for FY21/22E: Despite sharp correction in retail stocks, we see few value buys as for most, price performance is reflective of reduction in earnings power, esp. in apparel. (EBITDA cuts for FY21/FY22 range from -14 to 57%/-7-30% across universe). Subsequently TP cuts across universe range from -6 to -42%. We maintain our BUY rating on V-MART & ABFRL and SELL rating on D-MART.

Source : Equity Bulls

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