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3Q Preview: Jewellery and store expansion to drive growth

Overall aggregate revenue/ EBITDA growth in 3QFY25 for our consumer discretionary coverage universe is likely to be 19% (17% organic)/ 14% YoY. We expect the consumer discretionary segment to outperform the staples segment, which is expected to grow in midsingle digit YoY. Growth in the discretionary segment will be largely led by (i) Jewellery segment due to healthy festive and wedding season coupled with 3-4% correction in gold prices from highs and (ii) Avenue Supermarts, led by sharp recovery in revenue/sqft despite pressure from quick commerce. Growth in our QSR coverage will be expansion-led as SSSG/ADS recovery remains weak even on a low base. Footwear (ex- Bata) segment is expected to report double-digit growth. Shift in consumer preference towards the morevalue segment is expect to impact demand for mid-premium fashion players. Value fashion players are expected to grow in high double digits led by (1) shift from unorganised to organised segment, (2) value fashion players upping their product proposition and (3) downtrading by consumers in a challenging demand environment. Margin across our retail coverage (ex-Footwear) is expected to remain under pressure largely on account of negative leverage due to poor SSSG/LTL recovery and drag on account of store additions. Metro Brands and Go Fashion remains preferred picks within our coverage.

* SSSG remains weak within the discretionary segment ex-Titan and Avenue supermarts: We bake in 19% YoY (vs. 14% in 2Q; 17% organic growth in 3QFY25) aggregate revenue growth for our consumer retail coverage, led by (i) 27% growth in QSR (20% in 2Q; 13% YoY organic growth expected in 3Q), (ii) 24% growth in Titan (13% in 2Q), and (iii) 17% growth in Avenue Supermarts (14% in 2Q). The sector performance was dragged by (i) 10% growth in Apparel (9% in 2Q; 2% organic growth in 3QFY25) and (ii) 9% growth in footwear (vs. 8% in 2Q). Titan remains a positive outlier with ~24% growth led by a healthy wedding and festive season and reduction of 3-4% in gold price from its highs. Avenue Supermarts has shown better growth (~18% YoY in 3Q) led by strong recovery in revenue/sqft despite increasing competition from quick commerce players. Growth in QSR is primarily driven by store addition as the SSSG across the sector (ex-Jubilant) remains weak. Jubilant remains an outlier within QSR with 12.5% LFL growth, implying 10-11% SSSG. Footwear (ex-Bata) segment is expected to witness healthy growth in the quarter led by a healthy festive and wedding season while apparel is expected to struggle (2% organic growth) as demand for both ABFRL (ex-TCNS) and Go Fashion remains impacted majorly led by increasing consumer preference towards the value segment, which is expected to witness high double digit growth.

* EBITDA margin contraction on weak SSSG and robust store expansion: EBITDA growth is expected to be lower at 14% (vs. -1% in 2Q) vs. revenue growth of 19% YoY as margin is expected to contract by ~50bps YoY. EBITDA margin contraction is led by (i) ~50bps YoY contraction in QSR, (ii) ~120bps YoY contraction in Titan, and (iii) ~130bps YoY contraction in Apparel. On the other hand, Avenue Supermarts and footwear segment are likely to see EBITDA margin expansion of 20bps/220bps YoY respectively. Margins will remain impacted in Titan despite high growth and robust demand due to (i) higher salience of plain gold and gold coin in sales, and (ii) one-time impact of custom duty rate cuts (~30bps expansion after adjusting custom duty losses, largely led by ~940 bps expansion in margin in watches segment). Margin expansion is expected in footwear segment due to weak base in Bata and Campus and lower losses in FILA vs. last year. Avenue Supermarts is expected to see margin expansion as we expect an increase in the share of GM&A, which is margin-accretive. Margin in the apparel segment are expected to remain weak largely due to high base and weak operating performance. We expect weak SSSG in the QSR segment to result in weak operating leverage, leading to margin contraction in the segment.

* Key outliers within consumer retail space: Avenue Supermarts, Campus Activewear and Metro Brands are the positive outliers leading with robust revenue and PAT growth. Titan has shown robust revenue growth and is expected to report healthy margins (adjusting custom duty losses). Bata and ABFRL are negative outliers in the segment and are expected to report 4%/2% organic growth led by subdued demand.

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