Consumer Retail Sector Update : Subdued recovery keeps margins in check By JM Financial Services
Q3FY25 performance was a mixed bag with a strong first half largely on account of (1) festive season, and (2) low base, but a lean second half owing to weaker-than-expected wedding season and delayed winter. Consumption in Tier2/3 towns picked up while that in urban centres remained subdued. In terms of regions, South was the weakest while West was relatively better in terms of overall performance. Operating performance across a majority of companies was weak owing to weak gross margins and impact of negative leverage as SSSG/LTL/Volume growth remained subdued. Commentary of most of the companies suggested that demand patterns remain weak; however, they are not witnessing any further deceleration in demand trends. The income tax cut in the 2025 Union Budget bodes well for discretionary consumption and this could help to trigger a recovery in demand. Given that recovery in demand may come with a lag, we remain selective and prefer Metro Brands, Go Fashion and Sapphire Foods.
* Jewellery and Grocery leads growth; Footwear and apparel key drags: The aggregate revenue for our coverage universe grew ~18% YoY (~17% organic growth), sharp uptick vs. Q2FY25 and continued to outperform the staples universe, which grew by ~6% YoY. Discretionary outperformance was once again skewed towards jewellery companies, D'Mart, Devyani (Thailand consolidation) and Sapphire as weak demand trends continue to impact growth for the rest. Footwear players like Campus and Metro Brands posted revenue growth of ~ 9% and 11% respectively. Burger players like RBA and Westlife reported revenue growth of 11% and 6% respectively, largely led by store additions while SSSG growth remained muted. ABFRL and Go Fashion also witnessed subdued growth as both resorted to closure of smaller/non profitable stores. Avenue Supermarts’ revenue grew by ~17% YoY despite increase in competitive intensity from e-comm players. Titan’s jewellery segment revenue grew by 26% YoY, which led to 23% YoY growth for the company; we note growth in the jewellery segment was aided by ~26% YoY growth in gold prices.
* Operational performance impacted by decline in GM and negative leverage: The aggregate consumer discretionary EBITDA grew 8% YoY (sharp acceleration QoQ vs. 1% EBITDA decline in Q2FY25 and above the last 12 quarter average of 6% YoY growth). Discretionary segment saw divergent performance, with strong operational performance by footwear players (Bata, Metro and Campus) and ABFRL which witnessed sharp expansion in EBITDA margin led by high cost base and cost control measures. On the other hand, players like DMart and Titan witnessed muted operational performance primarily on account of sharp decline in gross margins. In Titan, gross margin ex-custom duty cut still declined by ~100bps YoY on account of lower studded share YoY. In the QSR segment, Westlife was the only company to witness a 5% YoY decline in EBITDA, while Sapphire and RBA EBITDA grew by 10% YoY. Devyani’s EBITDA growth at 35% was aided on account of Thailand consolidation, which was not in the base
* Multiple misses, largely operational led: On aggregate, revenue growth was a modest miss to our estimates (~1%) but the miss on the operational front was higher (5% miss) with 10 out of 11 companies missing our estimates. Key misses in our coverage were Campus, Devyani, Westlife, Titan, Go Fashion and Avenue Supermarts. ABFRL was the only beat both on operational and PAT fronts as the company prioritised profitability over growth. Avenue Supermarts’ miss was largely on account of lower-than-expected GM and high escalation in opex.
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