Retailers to gain from easier norms, recovery longer for malls, multiplexes

The relaxation also comes as a relief given that consumption segments were impacted by the slowdown even prior to Covid-19

Led by stocks in the consumer discretionary segment, the BSE 500 posted a 2.5 per cent gain in the trade on Monday. The increase in stock prices of companies in the retail, hotel, quick service restaurant, and multiplex segments was because of the expectations that lockdown relaxations in non-containment zones will boost demand. 

These segments were among the worst affected by the lockdown since March 25. The Ministry of Home Affairs allowed shopping malls, hotels, restaurants, and other hospitality services to reopen from June 8. Though multiplexes will remain shut, there is an expectation that these could reopen following further relaxations. 

The relaxation also comes as a relief given that the consumption segments were affected by the slowdown even prior to the Covid-19 outbreak. Private consumption grew just 2.4 per cent in the March quarter, as compared to 6.6 per cent in the December quarter, highlighting the extent of demand collapse faced by these sectors. 

Rajiv Sharma, head of institutional research, SBICAP Securities, believes relaxation could lead to a rise in consumption across sectors led by pent up demand, especially small-ticket discretionary spends within retail. The absorption of fixed costs — which account for anywhere between a fifth and about 60 per cent of revenues — is another benefit which will accrue to these discretionary plays. To reduce their high operating leverage, companies have been renegotiating their contracts and curtailing expansion. 

Gautam Duggad and Jayant Parasramka of Motilal Oswal Securities believe, on one hand, these relaxations will help improve the supply-side situation and potentially defray fixed costs, and on the other, it will drive consumption at the margin.

 

 

Within the various consumption buckets, hotels, restaurants, and malls could see a longer recovery period. Rahul Prithiani, director, CRISIL Research, believes that concerns on hygiene and social distancing are likely to continue to hit demand in the near term, especially for hotels, restaurant, and malls. The footfall is expected to be limited; social distancing will also limit capacity. Further, customer preference will be more for delivery-based online channels, given the infection concerns.

Analysts at CLSA bet on Jubilant FoodWorks, Westlife Development, and Titan Industries, all strong franchisees, to emerge stronger with improved business positioning, enabling them to gain market share. On the multiplex sector, things could get tougher as the sector is bracing to protect its business model from higher adoption of over-the-top applications on one hand, and a drop in occupancy because of consumer safety on the other.

Despite the optimism about demand in the discretionary consumption space, investors should be cautious, given the significantly high presence of these companies in urban markets. As much as 70 per cent of all cases are restricted to the top 20 districts, which include key cities and towns.  

The second worry is the expectations that if the situation worsens, restrictions could come back, nipping the demand recovery in the bud. The decision to announce a relaxation was on the back of a stable growth rate in the number of confirmed cases, a sharp increase in recovered cases and low fatalities. 

Finally, as India Ratings points out salary cuts, job losses, and reverse migration because of the lockdown have only added to the dwindling consumption demand, already reeling from reduced income growth of households, coupled with a fall in savings and higher leverage over the past few years. While there could be a surge in demand in the first few weeks after June 8, there is little clarity whether it will sustain.