Retail sector’s fall deepens in Q1FY24, says Nuvama; picks Titan, while cautions on Page Industries, Bata India

Brokerage house Nuvama Institutional Equities in its Q1FY24 earnings review report on the retail sector said that the sector's decline, which started in mid-Q3FY23, deepened in April-June quarter.

The domestic brokerage reported that performance missed verve although predictions regarding the muted outlook were met. Hope for a reviving of demand as the forthcoming festive period draws near was the theme that ran through all of the companies' narratives, the brokerage said in its report.

"Most companies are relying on demand reviving during festive driven by the usual spurt seen, which sustains also on the back of normalizing inflation. Immediate trends post Q1FY24 are not pointing to the same," added the brokerage.

The brokerage also stated that although consumption moderation is still present, it will gradually improve. While stock prices have fallen, it's important to spot the ones where the correction is only temporary and not structural.

The domestic brokerage noted that Westlife once again posted the strongest Same Store Sales Growth (SSSG), but with a narrowing difference compared to peers, while Trent once again displayed exceptional growth. Titan experienced an unexpected margin shortfall.

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Trent, Sapphire Foods, and Titan are the brokerage's top three recommendations in that order, while it is cautious of DMart, Page Industries, and Bata India.

"This quarter, we downgraded Shoppers Stop (HOLD to REDUCE) and Metro Brands (BUY to HOLD) on expensive valuations. Our top picks are Trent (traction in growth despite subdued demand), Titan (massive market share opportunity ahead), and Sapphire Foods (compelling valuation). We remain cautious on Avenue Supermarts (growth is normalising, putting valuation in question), Page Industries (stock valuation ahead of growth outlook) and Bata India (see limited revival in growth)," said the brokerage in its report.

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Let's look at the reasons cited by the brokerage for choosing the certain stocks as its top selections and for downgrading the stock.

Jewellery: Growth defies slowdown, but margins for Titan stutters

According to the brokerage's analysis, Titan experienced significant top line growth of 20% in the jewellery area (22% SSSG for Tanishq). Similar to Kalyan Jewellers (not rated), standalone operations saw a 34% YoY rise. Titan's margins, however, missed due to increased advertising, a moderated gold price premium, and the gold exchange.

QSRs: Pizza weakness continues; Westlife divergence moderating

Similar to previous quarters, the brokerage reported that pizza as a category witnessed worse-off SSSG compared to burger and chicken. Another industry-leading SSSG was produced by Westlife Foodworld. However, divergence between WFL and other peers has been closing.

Apparel retail, innerwear: Extended EOSS; Trent outshines again

In comparison to last year, the majority of apparel businesses began end of season sale (EOSS) 8–10 days sooner. Trent continued to outperform with a 33% 4Y CAGR in revenue. All payers indicated a significant contraction in the innerwear sector, the brokerage said.

Outlook

"Most companies are relying on demand reviving during festive driven by the usual spurt seen, which sustains also on the back of normalising inflation. Immediate trends post Q1FY24 are not pointing to the same," the brokerage said in its report.

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