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Q1FY23 Preview: Expect strong quarter; demand commentary key monitorable

After two years of partial and full lockdowns, Q1 was the first quarter to see normal operations. And, this should be visible in the performance of discretionary names. We expect most covered names to report strong 3-Y revenue CAGRs in the range of 9-22%. Although commodities like palm oil, cotton and PET (crude) have started to soften since Q1-end, margin pressures remained throughout the first quarter. As a result, companies implemented price hikes in the range of 5-15% YoY, which should help them partially offset the impact in Q1. We expect strong revenue momentum to continue for TTAN/PAG/VBL (16-22% revenue CAGR), while we expect JUBI/ABFRL/WLDL to see a growth acceleration vs. recent trends (9-12% CAGR in Q1FY23 vs. 5-8% in Q3FY22). On the basis of current TP upsides or potential earnings upgrades, we prefer PAG and TTAN in large-caps and ABFRL, WLDL, DEVYANI and VBL in mid/small-caps.

TTAN - strong Q1 to drive consensus upgrades:

While near-term volatility will be there due to the recent customs duty increases, strong Q1 sales (Rs93bn consol. topline) do present a case for consensus upgrades. Our annual estimates are 10-15% higher than consensus and we do not expect material changes as we expect near-term volatility to be absorbed in the subsequent period. We expect TTAN to see robust 3-Y consol. Rev./EBITDA CAGRs of 22%/24%. The Jewelry division (ex-bullion) continued to witness strong momentum with a 3-Y revenue CAGR of 23% (15-21% in the last 3 quarters). Watch/Eyewear segments lagged at 2-8% CAGR, but store additions at 39/56 were in line with the aggressive expansion plans for both. The studded mix improved in Q1 to pre-Covid levels of ~25%, and, thus, we see ~80bps margin gain from pre-Covid levels

QSR - price hikes to drive growth and help protect margins:

While Q1 saw minimal interruptions, commodities like oil/cheese/chicken/wheat saw significant inflation in the range of 15-30%. To mitigate the impact, Dominos/KFC/McDonalds/Pizza Hut effected ~15%/12%/10%/5% blended price hikes YoY, based on our analysis of menu prices. Taking this into account, we expect JUBI/WLDL to report a 3-Y revenue CAGR of 12%/9%, driven by 9%/3% store addition CAGR and the rest by SSG. We estimate that Devyani will report 105% growth YoY, driven by ~35% store count growth, price hikes and a low base. EBITDA margins should see a marginal decline vs. Q3 on RM inflation.

Higher mobility to help PAG/ABFRL:

We see 3-Y revenue CAGRs of 16%/12%/3% for PAG/ABFRL/TCNS. PAG should continue its strong growth, helped equally by volumes and realizations. ABFRL should see 11.5% CAGR vs. 7.5% in Q3, driven by continued traction in Madura, strong pick-up in Pantaloons and incremental contribution of ~2% by Ethnic. TCNS’ growth should be relatively weak due to the slow pick-up in the ethnic segment. However, we remain optimistic about a relatively strong performance in the monsoon-festive season, starting in Q2FY23. We believe price hikes and operating leverage will offset impact of cotton inflation on PAG/ABFRL. Thus, PAG should maintain the mid-point of its target margin band (20-22%) and ABFRL should see stable margins vs. pre-Covid. TCNS should see ~400bps margin decline on negative operating leverage.

VBL to benefit more from unlocking:

June quarter is the strongest quarter for VBL with pre-covid revenue/EBITDA salience of 40%/55%, thereby, benefitting more from complete unlocking. We expect continuation of strong 12% volume CAGR vs. pre-covid in Q2CY22. Increase in PET prices, shall lead to a ~300bps margin decline vs. pre-covid.

Key things to watch out for:

commentary related to consumption behavior toward the end of Q1 and early-Q2 to gauge demand trends in an inflationary environment; 2) trajectory of rental escalations, after concessions received in the Covid-period; and 3) steps taken to mitigate the impact of commodity inflation.

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