Retail Sector: Strong performance in Q1FY23; momentum to sustain in ensuing festive season

What's Buzzing 

After a solid performance in Q1FY23, the retail sector is gearing up for a strong festive season driven by improved consumer sentiment, wardrobe refresh and anticipation of higher discretionary purchases, which had remained subdued over the last two years due to the pandemic. 

Context 

The revenue recovery rate for most apparel players was the highest in Q1FY23 (115-140%). On a favourable base, our retail coverage universe reported revenue growth of 146% YoY with impressive three-year CAGR of 17% in Q1FY23. Most companies undertook a price hike in the range of 12-15% YoY to offset a spike in RM inflation. While price hikes did have an impact on price sensitive audience (ASP<Rs 400, V-Mart & Relaxo witnessed volume de-growth), mid-premium to premium segments (ABFRL, SSL) were more or less insulated. Despite inflationary pressures, our retail coverage universe maintained EBITDA margins at pre-Covid levels of 14%. Companies postponed their EOSS period and reduced discounting days as demand continued to be strong throughout Q1FY23. 

Our Perspective 

Q1FY23 was the first disruption free quarter in two years and the strong retail sector performance signifies that the consumer sentiment has improved with increase in footfalls and pick-up in discretionary purchases. We believe the momentum would continue in ensuing quarters driven by festivities based buying. We expect the revenue of companies in our coverage universe to grow at a CAGR of 26% in FY22-24E (CAGR of ~17% from pre-Covid market in FY20) driven by healthy space addition pipeline coupled with higher focus on omni-channel play (physical + online). Over the last two years, retail stocks have witnessed a re-rating with prices of retail stocks in our coverage universe appreciating ~2x over the last three years with a three year CAGR of 26%. Trent, Avenue Supermarts and Titan have been outperformers with three-year stock return CAGR of 47%, 45% and 37%, respectively. We expect premium valuations for the retail sector to sustain given India’s retail long term growth prospects. Among our retail sector coverage universe, ABFRL, Titan, Shoppers Stop and Trent are our preferred picks.