Retail sector revenues to sustain growth momentum - Q2FY23 preview

What's Buzzing

As per our channel checks, sales of retailers across consumption categories in July were strong and mainly driven by encouraging response to the End of Season Sales. Though August was relatively softer due to absence of major events, revenue traction improved significantly from third week of September onwards on account of festive buying and continues to be strong in October also. 

Context

On a favourable base, we expect retail coverage companies to post revenue growth of 30% YoY (three-year CAGR: 19%). To negate inflationary pressure, retailers across categories have taken price hikes of 12-15% in recent times. Higher ASPs are expected to impact volume growth for value fashion retailers like V-Mart. Mid-premium to premium segments (ABFRL, SSL) are expected to be more or less insulated. We expect similar demand trend to continue in Q2FY23. Q2 generally tends to have lower margins due to EOSS period (higher discounting). With higher rental and marketing expenses, we expect EBITDA margins to fall 70 bps QoQ to 12.8% (flattish YoY). 

Our Perspective

During the quarter, retailers continued calibrated expansion of their store network with opening of eight D-Mart stores, 25 Titan's Jewellery stores, 38 Titan EyeCare, 12 Zudio stores and 14 V-Mart stores.  Companies have restructured their existing store networks and aggressively enhanced footprint on a pan-India basis with emphasis on penetrating deeper in Tier III-V cities to capture potential demand pockets. Q2FY23 is expected to be the first festive disruption free quarter 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 uptick driven by increased sales promotions and beginning of festive based buying in second half of September and expect the revenue growth momentum to sustain in ensuing quarters. From a long term perspective, we expect strong revenue growth and gradual margin improvement which would enable retail companies to maintain premium valuation multiple going ahead.