Strangled wholesale business clouds recovery of Arvind, Aditya Birla Fashion, Raymond
Low volumes pulled Raymond into losses, Aditya Birla Fashion also reported a loss due to ongoing investments, while Arvind’s profits dropped 15%
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As concerns about demand intensified, shares of Arvind Ltd, Aditya Birla Fashion and Retail Ltd, and Raymond Ltd lost in the range of 9-21% from their November 2016 highs. If December-quarter results are anything to go by, recovery could be some time away.
Thanks to their presence in the value business, Arvind and Aditya Birla Fashion reported 15% and 5% growth in December-quarter revenues, respectively, despite the demonetization hit to demand. Sales at Raymond declined 5% as demand for branded textiles fell. Low volumes pulled Raymond into losses. While Aditya Birla Fashion also reported a loss due to ongoing investments, Arvind’s profits dropped 15%.
That said, the companies started the current quarter on a better note. As the cash crunch eases, retail business is slowly coming back to normal, they say. Raymond expects the wedding season from mid-January to partly compensate for the slowdown in sales. “Retail stores in large urban towns should recover to last year’s level by the end of the ongoing quarter,” Raymond said in a December-quarter results presentation.
The initial trends of the first three weeks of January suggest that the markets are leaving behind the impact of demonetization, and resuming normal growth rates, said Arvind. The company maintained its revenue growth guidance of 15% for the fiscal year, though it said its margins could be lower due to changing product mix.
Still, investors are not convinced. Shares of Aditya Birla Fashion and Raymond fell after their December-quarter results announcement. Though Arvind gained a bit, it saw earnings estimates cuts due to a warning on profitability.
Though the retail business is recovering, the wholesale and multi-brand outlets business is yet to return to normalcy. Aditya Birla Fashion and Arvind warn that the wholesale business could be hit for another quarter. “Wholesale channel is likely to take at least two more quarters to recover back to normal sales,” added Raymond.
This can undermine revenue growth of these companies. The wholesale business generates a significant portion of their revenues. Aditya Birla Fashion derived a third of its brands business (Madura Fashion and Lifestyle) from wholesale in the first nine months of the current fiscal year.
Also, wholesale business is not the only challenge these companies are facing. It is not yet clear if retail demand recovery will continue after the marriage season. The second is the pressure on profitability due to e-commerce sales campaigns. Though companies are realigning their businesses to the digital world, the fruits of these efforts are yet to be seen. Positive developments on these two (demand recovery and digital strategy) will be crucial for the stocks’ recovery.