16 October 2020 2QFY21 Results Preview Consumer …...pandemic). JioMART’s May launch has...

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

[email protected]

+91-22-6171-7320

Varun Lohchab

[email protected]

+91-22-6171-7334

(43) (46)(59)

(34)

(62)

(85) (87) (94) (88) (84)

(18)

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(10)(2)

(55)(42)

(70)(66)

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(100)

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AB

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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


COMPANY 2QFY21E


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



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



Inventory and debtor levels

Commentary on rental re-

negotiations

Strategy on liquidating

inventory without material

write-offs

Page | 4

Strategy report


COMPANY 2QFY21E


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



Working capital

Commentary on rental re-

negotiations

Strategy on liquidating

inventory without material

write-offs

Paints

COMPANY 2QFY21E


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%)




Page | 5

Strategy report


COMPANY 2QFY21E


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




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


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


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

Disclosure:

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16 October 2020 2QFY21 Results Preview Consumer …...pandemic). JioMART’s May launch has...

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