16 october 2020 2qfy21 results preview consumer …...pandemic). jiomart’s may launch has...
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16 October 2020 2QFY21 Results Preview
Consumer Discretionary
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No bargains here!
Recovery rates—a mixed bag: Revenue recovery in 2Q is expected to remain
choppy as intermittent lockdowns play spoilt sport. While the Paints and
Jewellery categories have nearly hit pre-COVID sales, apparel retail
continues to struggle as footfalls remain elusive, with recovery rates ranging
from 30-60%. Grocers, especially the online ones, continue to do well, as
consumers prefer convenience over value. Losses across the board are
ebbing. However, for apparel retailers, profitability improvement remains
on crutches (rental concessions and salary cuts). In this backdrop, assessing
(1) foregone vs recoverable revenue, (2) inventory position, (3) update on
rental negotiations and (4) leverage position remain key.
Jewellery—hits near pre-COVID sales: Volumes continue to languish
courtesy elevated gold prices (+40%). However, recovery in value growth is
encouraging. Most big-box jewellers’ sales are expected to decline by 0 to -
10% in 2Q (channel checks). Assessing ex-pent up demand remains key.
Margins are likely to be weak due to inferior product mix.
Increasing competitive intensity palpable among grocers: Grocers continue
to slug it out to capture a share of the rising online F&G pie (catalysed by the
pandemic). JioMART’s May launch has heightened competition. Along with
intermittent lockdowns, this could impact footfalls for prominent offline
discounters like DMART. Margins could be lower than usual as low-margin
essential purchases will continue to dominate the grocery basket in 2Q.
Apparel recovery remains choppy: Realisations may be weak for most
apparel retailers as this is an EOSS quarter—recovery rates of our universe
range from 30-60% of pre-COVID levels. Moreover, inventory for almost all
has deteriorated since Mar. Hence, the ask from festive throughput remains
high. While losses may ebb QoQ as stores are now open, the trajectory of
rental savings could come off directionally, and footfalls are yet to impress.
Paints lead in recovery: Paint firms have hit 100%+ of pre-covid sales as
they focus on the less-impacted tier 3/4 cities, low-end emulsions, primers
and putty. The revenues of Top-3 may grow by 2-5%. Margins may expand
260-290bp YoY as benign RM-led GM gains trickle down the P&L.
No bargains in the space: While stocks have recovered from their Mar lows,
one would be jumping the gun to call out a secular recovery just yet,
especially in apparel. Upgrades: Avenue Supermarts (SELL to REDUCE),
Downgrades: Titan (REDUCE to SELL), Trent (ADD to SELL) and V-
MART (BUY to ADD).
Company RECO TP
(Rs)
Prev.
TP
(Rs)
Avenue
Supermarts REDUCE 1,850 1,800
Titan SELL 1,050 950
ABFRL ADD 130 120
Trent SELL 500 490
STOP REDUCE 170 170
TCNS Clo. REDUCE 370 390
V-MART ADD 1,850 1,800
Asian Paints REDUCE 1,800 1,800
Berger Paints SELL 460 460
Kansai Nerolac ADD 500 500
Changes in recommendations
Company New
RECO
Earlier
RECO
Avenue
Supermarts REDUCE SELL
Titan SELL REDUCE
Trent SELL ADD
V-MART ADD BUY
Coverage Withdrawal
Company
Future Retail
Future Lifestyle Fashions
Arvind Fashion
Jay Gandhi
+91-22-6171-7320
Varun Lohchab
+91-22-6171-7334
(43) (46)(59)
(34)
(62)
(85) (87) (94) (88) (84)
(18)
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(55)(42)
(70)(66)
(40)
(4)
(100)
(80)
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(40)
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1QFY21 Sales Gr (%) 2QFY21 Sales Gr (%)
Page | 2
Strategy report
2QFY21 Results Preview
Retail
COMPANY 2QFY21E
OUTLOOK WHAT’S LIKELY KEY MONITORABLES
Avenue
Supermarts WEAK
The pandemic continues to remain harsh on the
discounter with 1. Intermittent state lockdowns
playing the spoilt sport, 2. JioMART remaining
aggressive on pricing as well as delivery options.
Expect D-MART to add 2 stores (net) in 2Q an SSSG
of -12%. Building in revenue per sq. ft of Rs. 26k.
Gross margins (GMs) however are likely to improve
sequentially as high GM non-essentials.commenced
in 2Q. Expect GMs to improve 40bp to 14.1% QoQ
Building in recovering profitability (EBITDAM 5.7%
in 2QFY21 vs 2.8% in 1Q and 8.7% in 2QFY20)
While recovering, net profits are still likely to fall
short YoY at Rs. 1.92bn.
Sales velocity and margins.
Pace of network expansion
Commentary on COVID-led
recovery
Progress on Online strategy.
Titan GOOD
Titan’s recovery has been better-than-expected. We
expect net revenue to decline by 2%. Overall EBIT
margin to come off by ~230bp YoY at 7.3%
Jewellery revenue grew 8.7% YoY (consol) which
includes a Rs. 3.9bn excess gold inventory sale. Ex-
that, Jewellery sales have hit near 98% of the base
quarter in 2Q. Our forecasts models a 25% decline in
volumes. Expect Jewellery EBIT margins to decline
190bp YoY to 8.5%.
Watches and Eyewear have recovered to 55/58% of
Pre-COVID sales resp.
Sept sales have come off again;
hence commentary on recovery
is key and consumer sentiments
Outlook on Watches and
Eyewear businesses
Jewellery business EBIT margin
Sept sales have come off again;
hence commentary on recovery
is key
Inventory levels and capital base
movement in Jewellery
Trent WEAK
Expected to be among the better-placed apparel
retailers to chart the recovery path given its
pervasive price points.
We expect revenue to recover back to 58% of Pre-
COVID sales (-42% decline YoY vs 87% decline in
1QFY21 and +33% in 2QFY20).
Our forecasts build in 51/90% revenue recovery YoY
for Westside and Zudio resp.
Expect a 280/410bp decline in Gross/EBITDA
margins (45/12% resp) courtesy 1. Unfavourable
operating leverage, However, the sequential
recovery is likely to be amongst the sharpest in
apparel retail as some part of inventory provisions
are likely to be written back
Commentary on Inventory
levels and revenue ramp-up
Rental savings
Page | 3
Strategy report
2QFY21 Results Preview
COMPANY 2QFY21E
OUTLOOK WHAT’S LIKELY KEY MONITORABLES
ABFRL WEAK
Given exposure to high-price point brand biz in
Madura and high formal apparel exposure, ABFRL’s
recovery is likely to be arduous.
We expect revenue to decline by 55% YoY (+15% in
2QFY20 and -85% in 1QFY21).
Expect Madura to decline by 59% YoY underpinned
mainly by the decline in Lifestyle brands. Innerwear
growth, too, is expected to moderate (run-rate
basis). Pantaloons expected to decline by 50%.
Monthly recovery run-rates for both biz remain
encouraging though.
EBITDA losses (Rs. 1.46bn) are likely to more than
halve QoQ as lockdown led losses in 1Q mean
revert.
While the recent fund raise via rights issue helps,
inventory-led right-offs, if material could soak some
of these funds.
Commentary on supply chain
recovery
Outlook on industry discount
levels post COVID-19 lockdown
Inventory and creditor levels
Trajectory of rental savings.
V-MART GOOD
Given the Tier3/4 focus and its value fashion
positioning, V-MART is likely to clock the sharpest
recovery in our apparel retail universe.
We expect revenue to hit 60% of Pre-COVID sales as
consumers return to stores for their need-based
purchases. Avg order values and Articles per order
remain high, implying, footfall recovery remains
lower than revenue recovery.
Building in 2 store additions for the quarter.
Expect V-MART to nearly touch EBITDA break-even
for the quarter as revenue recovery starts absorbing
fixed cost in the biz. Building in net losses of Rs.
~300mn in 2Q
Channel checks suggest inventory levels remain
higher than March (We build in a Rs. 4.9bn
inventory pile for 1HFY21).
Commentary on supply chain
recovery
Outlook on industry discount
levels post COVID-19 lockdown
Inventory and creditor levels
Trajectory of rental savings.
TCNS Clothing WEAK
Recovery for TCNS has remained amongst the
weakest within our universe. We build in a decline
of 66% YoY in 2Q as intermittent state lockdowns
impact footfalls. We build in revenue declines of
across -75/-75/-80/0% EBOs/LFS/MBOs/Online
channels resp.
Inventory is expected to be higher than the already
elevated March levels. Ergo, pricing power during
the unlock phase and leading to the festive season is
expected to be weak.
We expect gross margin to decline 15pp to 50% as
TCNS is likely to grapple with higher inventory
provisions and discount levels in 2H.
Building in net losses of Rs. 362mn in 2QFY21
Outlook on industry discount
levels post COVID-19 lockdown
Inventory and debtor levels
Commentary on rental re-
negotiations
Strategy on liquidating
inventory without material
write-offs
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Strategy report
2QFY21 Results Preview
COMPANY 2QFY21E
OUTLOOK WHAT’S LIKELY KEY MONITORABLES
Shoppers Stop WEAK
Given STOP’s predominant mall-based presence
(malls being the most impacted by the pandemic),
revenue recovery is likely to be the weakest in peer-
set
We expect revenue decline of 70% YoY in 2Q (vs -
94% in 1Q and -2% in 2QFY20).
We build in Rs. 304mn net losses in 2QFY21 vs PAT
of Rs. 1,372mn in 2QFY20
Outlook on industry discount
levels post COVID-19 lockdown
Working capital
Commentary on rental re-
negotiations
Strategy on liquidating
inventory without material
write-offs
Paints
COMPANY 2QFY21E
OUTLOOK WHAT’S LIKELY KEY MONITORABLES
Asian Paints
We expect a full recovery in the anchor biz -
decorative paints in 2Q (and ~10% volume growth
(vs ~38% decline in 1Q).
Channel checks suggest that East followed by North
and South have progressively picked up while West
lags the recovery curve.
Value will continue to lag volume as the focus on
utilising capacity via aggressive push in Economy
emulsions, primer, and putty continues. We build in
10/-5% volume growth /realisation decline in 2Q.
Expect a 1% growth in subsidiaries led by a recovery
in Indonesia.
EBITDA margins are likely to improve 260bp YoY as
GM expansion trickles down and A&P and other
SG&A expenses are reined in.
Recovery trajectory in October
Rebating and discounting trends
Dealer addition trajectory
Berger Paints
Berger to marginally outpace APNT given its higher
exposure to the less impacted Tier 2/3 and
North/East focus.
We build in ~5% YoY growth in standalone biz. (+9/-
4% volume/realization growth)
The contribution of STP acquisition would
marginally aid consolidated performance.
GMs are likely to improve QoQ as high-cost
inventory in 1Q normalizes. We expect a 170bp GM
improvement QoQ to 41.7%.
EBITDA margin expansion is likely to be ahead of
GM expansion (240bp YoY at 18.1%) underpinned
by GM savings and controlled A&P, and other
SG&A spends. Net profit decline of 7.5% is due to
lower tax rate in the base quarter. (ETR 6.2%)
Recovery trajectory in October
Rebating and discounting trends
Dealer addition trajectory
Page | 5
Strategy report
2QFY21 Results Preview
COMPANY 2QFY21E
OUTLOOK WHAT’S LIKELY KEY MONITORABLES
Kansai Nerolac
We model a 2.5% top-line growth underpinned by a
4% YoY growth in decorative biz and a flat
Industrials growth.
Note: Growth in decorative paints comes off a weak
base as KNPL’s top-line was impacted due to the
J&K curfew following revocation of Article 370 in
Aug 2019 in the base quarter (A key catchment). We
estimate +8%/-4% volume/realization growth in
decorative biz. Auto coatings segment is likely to
recover mimicking that of the client base.
As mix normalises towards Industrials (Low GM
biz), GMs are likely to contract. Building in 120bp
contraction/210bp expansion to 40.5% QoQ/YoY
resp.
Expect healthy EBITDA margin expansion QoQ and
YoY (21.5%, up 290bp YoY) as recovery-led
operative leverage kicks in
Recovery trajectory in October
Rebating and discounting trends
Dealer addition trajectory
Estimate Changes
Avenue Supermarts
(Rs mn)
FY21E FY22E FY23E
New Old Change
(%) New Old
Change
(%) New Old
Change
(%)
Revenue 249,353 259,978 (4.1) 351,654 349,596 0.6 351,654 349,596 0.6
Gross Profit 35,710 36,440 (2.0) 52,741 52,434 0.6 52,741 52,434 0.6
Gross Profit Margin (%) 14.3 14.0 30 bps 15.0 15.0 (0 bps) 15.0 15.0 (0 bps)
EBITDA 18,001 18,940 (5.0) 30,414 30,279 0.4 30,414 30,279 0.4
EBITDA margin (%) 7.2 7.3 (7 bps) 8.6 8.7 (1 bps) 8.6 8.7 (1 bps)
APAT 11,755 12,800 (8.2) 20,418 20,716 (1.4) 20,418 20,716 (1.4)
APAT margin (%) 4.7 4.9 (21 bps) 5.8 5.9 (12 bps) 5.8 5.9 (12 bps)
EPS (Rs) 18.1 19.8 (8.2) 31.5 32.0 (1.4) 31.5 32.0 (1.4)
The Titan Company
(Rs mn)
FY21E FY22E FY23E
New Old Change
(%) New Old
Change
(%) New Old
Change
(%)
Revenue 181,434 170,417 6.5 248,819 231,087 7.7 295,232 274,337 7.6
Gross Profit 44,814 42,093 6.5 66,447 61,712 7.7 78,709 73,138 7.6
Gross Profit Margin (%) 24.7 24.7 0 bps 26.7 26.7 - 26.7 26.7 (0 bps)
EBITDA 15,059 14,451 4.2 27,233 25,293 7.7 32,653 30,342 7.6
EBITDA margin (%) 8.3 8.5 (18 bps) 10.9 10.9 (0 bps) 11.1 11.1 (0 bps)
APAT 7,560 7,257 4.2 16,765 15,809 6.0 20,810 19,685 5.7
APAT margin (%) 4.2 4.3 (9 bps) 6.7 6.8 (10 bps) 7.0 7.2 (13 bps)
EPS 8.5 8.2 4.2 18.9 17.8 6.0 23.4 22.2 5.7
Source: HSIE Research
Page | 6
Strategy report
2QFY21 Results Preview
Financial Summary
Company
NET SALES (Rs bn) EBITDA (Rs bn) EBITDA margin (%) APAT (Rs bn)
2Q
FY21E
QoQ
(%)
YoY
(%)
2Q
FY21E
QoQ
(%)
YoY
(%)
2Q
FY21E
QoQ
(bps)
YoY
(bps)
2Q
FY21E
QoQ
(%)
YoY
(%)
Food & Grocery
Avenue Supermarts 53.4 39.3 (10.2) 3.1 182 (40) 5.7 291 (291) 1.9 NM NM
Jewellery
Titan 45.7 130.8 (2.0) 4.3 NM (18) 9.3 NM (185) 2.3 NM NM
Apparel
ABFRL 10.4 224.9 (55.0) (1.5) NM (143) (14.1) NM (2,876) (3.1) NM NM
Trent 4.7 389.8 (42.3) 0.6 NM (57) 12.2 NM (409) (0.3) NM NM
STOP 2.5 370.3 (70.0) (0.3) NM (122) (12.0) NM (2,823) (0.7) NM NM
TCNS Clothing 1.1 238.8 (65.8) (0.4) NM (156) (33.0) NM (5,328) (0.4) NM NM
V-MART 1.9 141.5 (40.0) - NM (100) - NM (360) (0.3) NM NM
Paints
Asian Paints 52.4 79.2 3.7 11.3 133.0 18 21.5 497 264 7,254 230 (14)
Berger Paints 16.8 80.7 5.2 3.0 230.4 21 18.1 820 238 1,800 1,093 (8)
Kansai Nerolac 12.7 112.9 2.4 2.5 216.0 19 20.0 652 286 1,770 315 (8)
Valuation Summary
Company
Mcap
(Rs
bn)
CMP
(Rs) Reco.
TP
(Rs)
EPS (Rs) P/E (x) EV/EBITDA (x) Core ROCE (%)
FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E
Avenue Supermarts 1,247 1,975 REDUCE 1850 18.8 32.7 39.1 104.9 60.4 50.5 69.2 40.9 32.2 12.4 19.3 19.5
Titan 1,089 1,231 SELL 1050 8.5 18.9 23.4 146.7 66.1 53.3 76.1 42.2 35.2 7.8 15.6 17.5
ABFRL 104 135 ADD 130 -10.9 -6.1 -5.5 -11.8 -21.0 -23.2 -380.6 13.0 10.9 -24.3 -5.7 -6.3
Trent 235 663 SELL 500 0.3 3.4 3.3 NM NM NM 59.0 39.5 34.7 2.9 5.8 5.7
STOP 15 173 REDUCE 170 -14.3 -4.3 -1.2 NM NM NM -31.1 8.5 6.2 -18.2 -7.1 -2.3
TCNS Clothing 23 379 REDUCE 370 -10.3 8.0 10.5 -33.2 42.7 32.6 -19.9 25.1 17.5 -22.9 10.4 12.7
V-MART 35 1,931 ADD 1850 20.9 43.3 53.3 85.3 41.3 33.5 36.4 21.9 17.7 8.4 17.6 19.2
Asian Paints 1,993 2,078 REDUCE 1800 25.2 33.4 37.7 77.5 58.6 51.9 48.0 38.0 34.5 23.5 31.5 35.0
Berger Paints 587 606 SELL 460 6.0 7.9 8.9 100.0 76.2 67.6 60.5 47.2 41.7 17.6 21.5 22.1
Kansai Nerolac 264 490 ADD 500 7.9 10.6 11.9 61.9 46.4 41.2 36.6 28.6 25.4 10.7 13.8 14.0
Source: HSIE Research
Page | 7
Strategy report
2QFY21 Results Preview
HDFC securities
Institutional Equities
Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park,
Senapati Bapat Marg, Lower Parel, Mumbai - 400 013
Board: +91-22-6171-7330 www.hdfcsec.com
Rating Criteria
BUY: >+15% return potential
ADD: +5% to +15% return potential
REDUCE: -10% to +5% return potential
SELL: > 10% Downside return potential
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