Despite biting inflation, analysts bullish on retail stocks for long haul

Analysts believe that the Indian retail sector is on the 'cusp of accelerated earnings growth' as consumer sentiment, and discretionary purchases bounce back from Covid-19 pandemic

Notwithstanding the inflation pinch, analysts believe the Indian retail sector is on the ‘cusp of accelerated earnings growth’ as consumer sentiment and discretionary purchases bounce back from the Covid-19 pandemic.

“The shift in consumer preference from the unorganised sector to the organised, coupled with uptick in domestic demand as people resume work from office, will cheer the Indian retail sector,” says Nishit Master, portfolio manager, Axis Securities.

Shopping malls are witnessing increased footfall in lower tier towns and standalone stores as consumption picks up and mobility improves.

Retailers, too, plan to ramp up store expansion in 2022-23 (FY23) as sales recover to pre-pandemic levels.

While Aditya Birla Fashion and Retail (ABFRL) aims to add around 400 stores to its ‘Lifestyle’ format, Shoppers Stop plans to add 12/13 new department stores.

“Mall-based retailers like Shoppers Stop and Pantaloons could grow relatively fast in the first half of FY23 as uniform growth across channels pushed for healthy store expansion. As companies look to enhance the performance of their stores via renovations, we expect them to have a positive impact on their same-store-sales-growth (SSSG) figures in the first half of FY23,” wrote analysts at PhillipCapital.

Meanwhile, analysts at IIFL Securities believe that quick-service restaurant (QSR) players reported positive SSSG in the January-March quarter of 2021-22 on a yearly basis, resulting in a positive SSSG for all players on a three-year compound annual growth rate basis.

“Although the QSR space is at a nascent stage, we expect sales to gradually pick up pace in the near term. We retain a ‘buy’ stance on Jubilant FoodWorks over the long term,” says A K Prabhakar, head of research, IDBI Capital.

When it comes to fashion and clothing, Gaurav Dua, head-capital market strategy, Sharekhan by BNP Paribas, remains bullish on domestic players like Trent, ABFRL, and Bata India to perform well in the quarters ahead, driven by strong domestic demand.

The impact of inflation may act as a dampener across segments. The increase in freight and power costs due to increase in crude oil prices and disruptions in supply-chain dynamics can put Indian retail players through the wringer, warns V K Vijayakumar, chief investment strategist at Geojit Financial Services.

“Although retail stocks like Avenue Supermarts have corrected sharply in tune with market correction, it would be premature to conclude they have become buyable now. Valuations are not cheap. The sector faces headwinds from high inflation and consequent weak demand,” adds Vijayakumar.

To offset margin pressure emerging from high input cost and inflation, companies like Jubilant FoodWorks, Westlife Development, V-Mart Retail, Barbeque (BBQ) Nation, and Devyani International took price hikes in the range of 6 per cent to 11 per cent in April.

Overall, retail stocks have delivered a mixed performance so far this calendar year. Shares of Jubilant FoodWorks, ABFRL, Sapphire Foods, Devyani International, BBQ Nation, Bata India, Avenue Supermarts, and V-Mart Retail have shed between 7 per cent and 32 per cent in the past six months.

On the contrary, Shoppers Stop, Trent, and Metro Brands have gained between 1.6 per cent and 49 per cent during the same period.

In comparison, the Nifty50 and the S&P BSE Sensex have bled 11 per cent each.

Broader markets, too, have lost in tandem, with the Nifty Midcap 100 and the Nifty Smallcap 100 losing over 13 per cent and 25 per cent, respectively.