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Omicron to impact pace of growth in Q4; strong recovery expected from Q1FY23

ICICI Securities 11 Apr 2022

What’s Buzzing:

As per our channel checks, apparel retailers in Q4FY22E on a per store basis have registered recovery rate in the range of 50-60% in January (owing to trade being impacted by Omicron Covid variant) while February was a month of recovery gaining ground to 80-85% of pre-Covid levels. However, March has seen a sharp recovery with most apparel companies being able to surpass pre-Covid levels owing to strong demand driven by opening up of offices, reopening of schools and increased demand due to the wedding season.

Context:

We expect companies in our coverage universe to report close to pre-Covid sales in Q4FY22 led by higher store additions in last couple of quarters and price hikes. We expect our coverage universe to report revenue growth of 12.9% YoY in Q4FY22. In a bid to negate inflationary pressure (all time high yarn prices), apparel retailers have taken price hikes in the range of 8-12% and passed on the same to the consumers, which has aided in supporting the gross margins. We expect EBITDA margin for our coverage universe to remain flattish at 11.2% with expected EBITDA growth of 13.4% YoY.

Our perspective:

Though the quarter began on a subdued note owing to trade disruption in January due to impact of Omicron Covid variant, the retail sector has witnessed sharp recovery towards the end of Q4FY22. Increased footfalls across retail stores signify improved consumer sentiments with revenues for most companies trending close to pre-Covid levels by end of Q4FY22. The companies have expanded retail footprint in anticipation of an upbeat Q1FY23, which is expected to be normal after a gap of two years of lockdowns in the same period. We continue maintain a positive stance on the sector due to strong demand traction owing to near full scale opening of offices, reopening of schools and the impending strong wedding season (owing to higher number of marriages). Also increased spend on discretionary and premium products would aid in improving the margins over the longer term. With dual levers of revenue growth and margin improvement over the longer term, we expect the retail companies to maintain premium valuation multiple, going ahead.

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