Graphic: Mint
Graphic: Mint

Retail: Underlying demand seems stable, for now

Results of retail companies will reflect this shift in the festive season, which means the September quarter results would be relatively weaker

Are people shopping more in India? Perhaps not as much as retail companies would like. Expectations from the September quarter financial results for retail firms are not too optimistic. This year, the entire festive season falls in the December quarter. In 2017, part of the festive season fell in the September quarter (Dussehra was in September last year). Accordingly, results of retail companies will reflect this shift in the festive season, which means the September quarter results would be relatively weaker.

For apparel retailers, Edelweiss Securities Ltd estimates decent same-store sales growth when seen on a two-year average basis. It would still be softer on account of the pushback of the festive season to the December quarter, adds the brokerage firm. Additionally, the discount sale season is expected to boost same-store sales growth for the September quarter.

Same-store sales growth is the comparable sales growth of stores that have been operational for over a year.

Edelweiss says for grocery retailers, the buoyant same-store sales growth run rate will continue—Avenue Supermarts Ltd (running D-Mart stores) is expected to report same-store sales growth of about 15% and Future Retail Ltd’s same-store sales growth is seen at about 8%.

In its quarterly update, Titan Co. Ltd has said that after a soft June quarter, its jewellery business picked up in the September quarter. Market share gains have helped, said the company that derives about three-fourths of its revenue from the jewellery business. Titan’s watch business continued the good run seen in the June quarter.

In general, investors should watch for the store additions made during the quarter and management commentary.

In the immediate future (the festive season), there aren’t any big threats to consumption as far as retail companies go. The underlying demand trend remains steady, so retailers are confident of a strong festive quarter in the three months ended December, say analysts from Jefferies India Pvt. Ltd. “Benefits of cost savings and store rationalisation should continue but lower operating leverage will impact margins," it said.

Further, interest rates are headed upwards. Investors in retail companies should watch for the adverse impact on consumption in a rising interest rate environment. What this means is that how demand shapes up after the December quarter will determine to a great extent whether shares of these companies would appear attractive to investors. So far this year, apart from the Avenue Supermarts stock, shares of Titan, Future Retail and Shoppers Stop Ltd have underperformed the BSE 100 index.

“We continue to prefer apparel retailers (Aditya Birla Fashion and Retail Ltd, Trent Ltd, Shoppers Stop) to grocery (D-Mart, Future Retail)," said Jefferies in a report on 4 October. “Though grocery and value apparel segments are best positioned, valuations are factoring all positives, in our view."