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Solid Q1FY23 print; geared up for strong festive season

Buoyed by strong wedding/festive season and a normalised quarter after a gap of two years, lifestyle retailers displayed a strong show with robust topline growth. Revenue recovery rate for most apparel players was the highest in Q1FY23 (115- 140%). On a favourable base, our retail coverage universe reported revenue growth of 146% YoY with impressive three-year CAGR of 17% in Q1FY23. Most companies undertook a price hike in the range of 12-15% (YoY) to offset a spike in RM inflation. While price hikes did have an impact on price sensitive audience (ASP<| 400, V-Mart & Relaxo witnessed volume de-growth), mid-premium to premium segments (ABFRL, SSL) were more or less insulated. Despite inflationary pressures, our retail coverage universe maintained EBITDA margins at pre-Covid levels of 14%. Companies postponed EOSS period and reduced discounting days as demand continued to be strong throughout Q1FY23. Retail sector appears to be on the cusp of delivering strong sustained revenue growth driven by improved consumer sentiment, wardrobe refresh and increased spend on discretionary purchases as consumer wallet share on non-essentials had remained subdued for last two years

Disruption free quarter leads to robust performance in Q1FY23

For Q1FY23, Trent continued to be the outperformer with sales more than doubling vs. pre-Covid levels (three-year CAGR 29%). The industry leading revenue growth was mainly owing to sustained robust trajectory of store addition pace (2x stores vs. pre-Covid levels) and is also supported by healthy SSSG for Westside format (24% over pre-Covid levels). For Titan, its jewellery division continued to gain market share with an impressive three-year revenue CAGR of 24%. One of the key positives during the quarter was share of studded ratio surpassing pre-Covid levels with contribution increasing 400 bps YoY to 26.0% (yields higher margins). For ABFRL, overall revenue recovery rate in Q1FY23 reached 139% of pre-Covid levels (I-direct estimate: 131%). The accelerated trajectory was on the back of robust growth in Lifestyle brands (Allen Solly, Van Heusen, Louis Philippe and Peter England) with revenues increasing 249% YoY (three year CAGR: 15%). Owing to strong wedding season and wardrobe refresh, revenue recovery rate for Shoppers Stop surpassed pre-Covid levels for the first time in Q1FY23 (113% of pre-Covid levels). Customer footfalls have now reached pre-Covid levels with average basket value up ~31% to | 4344. Avenue Supermarts (D-Mart) revenue grew at a three-year CAGR of 20% during the quarter. The management highlighted that recovery in GM & apparel categories (yields better gross margins) was encouraging and witnessed better traction than the previous quarter (but still remains below pre-Covid levels).

Well poised to capture long term growth opportunity

We expect the revenue of companies in our coverage universe to grow at a CAGR of 26% in FY22-24E (CAGR of ~17% from pre-Covid market in FY20) driven by healthy space addition pipeline coupled with higher focus on omni-channel play (physical + online). Over the last two years, retail sector stocks have witnessed a re-rating with prices of retail stocks in our coverage universe have appreciated ~2x over last three years with a three year CAGR of 26%. Trent, Avenue Supermarts, Titan have been outperformers with three-year stock return CAGR of 46%, 45% and 35%, respectively. We expect premium valuations for the retail sector to sustain given India’s retail long term growth prospects. Key top picks: ABFRL, Titan, Shoppers Stop and Trent

Company specific views:

Aditya Birla Fashion & Retail (ADIFAS)

ABFRL combines Madura’s portfolio of leading power brands (Allen Solly, Van Heusen, Louis Philippe and Peter England) with Pantaloons’ forte of largest value fashion retailer. Overall revenue recovery rate reached 139% of pre-Covid levels in Q1FY23 mainly driven by strong show in lifestyle brands. New category launches in active wear and casual wear and robust store additions in last three years (540+ stores) have fuelled growth. Revenue recovery for Pantaloons (36% of sales) was lagging lifestyle brands owing to a larger share of mall stores (~ 58%) that had prolonged restrictions. With first normalised quarter after a gap of two years, the segment displayed a strong performance in Q1FY23 with sales growth of 367% YoY (115% of pre-Covid levels). Demand trends continue to be strong with major drivers being strong wedding season and revival of formal portfolio with opening up of offices. Ethnic space continues to be the next growth engine for ABFRL with the business currently operating at an annual run rate of | 400 crore. ABFRL has aggressive store addition plans for FY23E with 75+ Pantaloons store and 400+ (franchisee) lifestyle brand stores. The recent announcement of fund raising worth | 2195 crore (equity + warrants) to GIC, would enable ABFRL to meet its long term capital needs and improve its competitive positioning.

The stock price of ABFRL has appreciated ~63% over the last three years. ABFRL has strengthened its balance sheet through recent equity infusion and right issue with net debt declining sharply from | 2500 crore (in FY20) to ~| 650 crore. We believe ABFRL with lighter balance sheet and strong bouquet of brands is well placed to accelerate the pace of store addition and revenue growth. We reiterate our BUY rating with a target price of | 370 (2.5x EV/sales FY24E).

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