Motilal Oswal Financial Services

Update | 30 March 2021

Retail

Our earlier retail update

Slow recovery, increase in RM costs cast shadow on retailers

After steady recovery in sales in the festive season (in 3QFY21), the Retail industry

is witnessing positive trends such as the resumption of store adds and improving

WC and leverage positions. However, factors such as softness in recovery trends

(given the rise in COVID cases) and the risk of increasing RM costs remain

deterrents. The recent correction does offer a better entry point in these stocks –

especially given their better competitive positions and balance sheets, and the

potential growth in retail stocks. Nevertheless, we believe the market exuberance

may cool down until we see revival in revenues over the next six months. Here are

the key takeaways from our channel checks.

Revenue recovery slow and gradual

Over Jan–Feb’21, retailers across categories, barring QSR and Consumer Durables,

continued to deliver revenue below the last year’s base pre-COVID. Apparel

companies, particularly, reported the highest revenue declines (v/s last year) at 15–

20% (Exhibit 3). The impact of the second wave of COVID in some regions, followed

by government restrictions, has been lower on store operations. However, footfall

has been slow and, in turn, derailed the MoM sales recovery trend seen up to

Dec’20. We continue to see a better trend in high-street stores and tier 2/3 city

stores than large-format stores and metro / tier 1 stores. Yet, the favorable base in

March – due to 10- to 15-day store closures in the corresponding quarter, coupled

with festive shopping expectations – could see March at around 100–110% of last

year’s sales. Subsequently, we expect ABFRL/Trent/V-Mart to post 3%/12%/8% YoY

revenue growth in 4QFY21. Grocery retailers such as DMart have recovered with

100–105% of LTL sales over Jan–Feb’21; in 4QFY21, it is expected to report over 20%

growth, benefiting from a favorable base due to last year’s lockdown impact. Sales

trends in Trent are likely to benefit from fewer Westside stores in malls. Zudio’s

strong performance is attributable to customer downtrading and 35 store additions

(44% YoY) in YTDFY21. In ABFRL, the Retail business in Lifestyle continues to perform

better. However, Pantaloons – which has large-format stores and a high proportion

of stores in malls – may see slower sales recovery. V-Mart should benefit from its

higher share of stores in tier 2/3 cities.

Store adds resume steadily

Weak throughput is rendering the Real Estate market conducive for retailers. A

lower competitive intensity has curbed irrational rental deals at prime locations.

Subsequently, retailers with better liquidity positions have commenced store

additions at a steady pace. We expect Westside to add 6, Zudio to add 14, and V-

Mart to add 7 stores in 4QFY21. Furthermore, the managements of retailers have

indicated that retailers would resume a steady rate of 15–20% store additions from

FY22E (as in the pre-COVID era).

Aliasgar Shakir - Research Analyst

(Aliasgar.Shakir@motilaloswal.com)

Research Analyst: Suhel Shaikh

(Suhel.Ahmad@MotilalOswal.com) /

Anshul Aggarwal

(Anshul.Aggarwal@motilaloswal.com)

30 March 2021

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Investors are advised to refer through important disclosures made at the last page of the Research Report.

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Escalating RM costs a red flag

At this time when apparel demand is still sluggish, the surge in raw material prices

remains a big dampener. Cotton yarn and crude-based fabric prices have rallied

nearly 30% in the last six months. Typically, fabric costs contribute 25–35% to the

total raw material cost – depending on the category of the apparel player. Hence,

this could result in an 8–10% increase in overall raw material costs. Old inventory

may have cushioned the impact up to Feb’21; however, the impact of rising RM cost

should start reflecting from Mar’21. Based on our discussion, retailers may gradually

endeavor to pass on the cost increase from 1QFY22. However, given the weak

demand scenario, it may take a couple of quarters to fully pass on the increase in

cost, thus potentially impacting gross margins by 150–400bps.

Sales recovery alleviating working capital stress, improving balance sheet

The high inventory position has largely relaxed over the last six months and payables

have normalized. We observe large retailers have taken advantage of the COVID

disruption to now operate with a leaner inventory and payable days. This has given

them multiple advantages in the form of better commercial terms, product

availability, and quicker design turnaround. This would further enable larger

retailers to improve their competitive positions and gain market share. Also,

curtailed cash burn, along with the easing of liquidity, should improve the leverage

positions of retailers across the board.

Valuation

The Retail industry still faces the risk of increasing commodity costs and is yet to

come out of the woods completely. Hence, in terms of pre-COVID scale, the rich

valuation certainly raises concerns – DMart is trading at FY23E EV/EBITDA of 47x and

apparel retailers Trent, ABFRL, and V-Mart are trading at FY23E EV/EBITDA of 32x,

13x, and 18x, respectively. Over the last month, retail stocks have corrected 10–

20%, offering a better entry point – especially given their better competitive

positions, balance sheets, and growth expectations, which could provide strong

tailwinds once the market has revived. Nevertheless, we feel the market exuberance

may cool down and upsides may be capped until we see revival in revenues over the

next six months.

Exhibit 2: Cotton/Oil prices up by 30%/36% in the past six

months (rebased to 100 in Aug’20)

4400

Rise in cotton prices

Rise in oil prices (%)

122%

136%

121%

111%

90%

97%

130%

Exhibit 1: Cotton/Oil prices on continuous uptrend

Price/Kg (INR)

3240

115

2980

115

2930

121

3140

127

Price/barrel (INR)

3920

3590

132

140

149

100%

105%

110%

115%

92%

Source: MOFSL, Company

30 March 2021

Media

Exhibit 3: Apparel retailers see revenue recovery of 83–88% YoY over Jan–Feb’21, led by rising economic sentiment

Sep'20

Oct'20

Nov'20

Dec'20

Jan'21

Feb'21

Apparel

F&G

Footwear

Cosumer Durables

Jewellery

Source: RAI Retail Survey, MOFSL

Exhibit 4: Gross margins of retailers (hit on account of inventory provisioning) recover to near pre-COVID levels in 3QFY21,

but rising commodity prices may hurt near-term margins (gross margins in %)

1QFY20

2QFY20

ABFRL

Shoppers Stop

4QFY20

Trent

1QFY21

2QFY21

3QFY21

Source: MOFSL, Company

V-Mart

D-Mart

3QFY20

Exhibit 5: Retailer’s revenue up ~8% YoY over Jan–Feb’21; expect retailers to post YoY revenue growth on favorable base in

Mar’21 (closure of Retail biz for 15–20 days in Mar’20)

1QFY21

-17%

-45%

-87%

13%

2QFY21

3QFY21

-11%

-33%

4QFY21E

11%

31%

-20%

-56%

-85%

ABFRL

-16%

-44%

-83%

-13%

-29%

-65%

Trent

V-Mart

-94%

Shoppers Stop

D-Mart

Source: MOFSL, Company

30 March 2021

Media

Exhibit 6: Retailers resume store additions; pace likely to pick up from 4QFY21

Total Store count

Madura EBO's

Pantaloons

DMART

Shoppers Stop

Westside

Zudio

V-Mart

Store adds

Madura EBO's

Pantaloons

DMART

Shoppers Stop

Westside

Zudio

V-Mart

1QFY19

2229

282

157

130

179

2QFY19

2288

288

160

135

190

3QFY19

2369

302

164

142

200

4QFY19

2406

308

176

150

214

1QFY20

2506

314

184

155

227

100

2QFY20

2544

331

189

161

239

3QFY20

2656

343

196

167

257

112

4QFY20

2699

342

214

165

266

-1

-5

-2

1QFY21

2662

342

216

166

266

-37

2QFY21

2686

339

220

166

264

-3

-2

3QFY21

2813

344

221

169

101

274

127

-1

Source: MOFSL, Company

Exhibit 7: MOFSL Retail Universe – recommendation

MOFSL

Recommendatio

INR

ABFRL

Buy

Trent

Neutral

V-Mart

Buy

Shoppers Stop

Neutral

D-Mart

Neutral

Target

price

230

660

3,500

220

2,850

Peak share

price

in Feb-Mar'21

224

955

3,128

269

3,330

Last closing

price

204

762

2770

213

2837

Correction from recent

peak

-9%

-20%

-11%

-21%

-15%

FY22E EV/EBITDA FY23E EV/EBITDA

(x)

Source: MOFSL, Company

30 March 2021

Media

Explanation of Investment Rating

Investment Rating

Expected return (over 12-month)

BUY

>=15%

SELL

< - 10%

NEUTRAL

< - 10 % to 15%

UNDER REVIEW

Rating may undergo a change

NOT RATED

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within

following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.

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30 March 2021