Strong sales trend likely to sustain valuations of apparel retailers

ABFRL is top pick in the sector, followed by Shoppers Stop and V-Mart

The country’s largest listed apparel players clocked in sales exceeding pre-pandemic levels, aided by festival sales, easing restrictions, increased pace of vaccination, pent-up demand, and a favourable base. Average sales growth for Trent, Aditya Birla Fashion and Retail (ABFRL), Page Industries, V-Mart, and Shoppers Stop were upwards of 45 per cent.

Trent, which has been outperforming the sector over the last year and a half on the revenue growth front, topped the sales charts again with a year-on-year (YoY) growth of 86 per cent. Westside, which accounts for 74 per cent of the revenues, crossed the Rs 1,000 crore-mark for the quarter. Overall, growth is estimated to be driven by the company’s value fashion format, Zudio. Given that the company has been aggressive on store addition front for this format, with an increase of 2-2.5x, brokerages expect Zudio’s revenue growth to be 3x over pre-Covid levels.

Given the strong revenue recovery, store productivity above pre-Covid levels, and aggressive store additions, Aliasgar Shakir and Harsh Gokalgandhi of Motilal Oswal Research have revised their revenue and operating profit estimates for 2022-23 (FY23)/2023-24 (FY24) by 10 per cent each for Trent.

ABFRL’s revenue at just under Rs 3,000 crore was up 44 per cent and is 15.7 per cent above pre-Covid levels. While recovery in the lifestyle segment is 120 per cent of pre-Covid levels, Pantaloons segment is at near pre-Covid levels. The wholesale channel was lagging during the pandemic and saw recovery, boosted by healthy demand. What could drive incremental growth are forays into new categories (footwear, beauty, direct-to-consumer) and expansion of existing segments. Given the performance in the quarter, especially the impacted segments of Pantaloons/wholesale, analysts at Emkay Research raised their FY23/24 operating profit by 10-13 per cent and forecast 2019-20 (FY20) through FY24 average operating profit growth of 30 per cent.

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Results of the largest listed innerwear player, Page Industries, were above estimates on most counts. The top line growth of 28 per cent was largely driven by volumes, with realisations gaining somewhat. Volume growth of 26 per cent was aided by expansion of its presence in multi-brand outlets by 59 per cent over the last two years to 105,000 outlets. IIFL Research, however, has a ‘Reduce’ rating. Analysts, led by Sameer Gupta, at the brokerage say, “While volume performance has been impressive, we believe it is partially aided by pent-up demand and disruption in the unorganised segment. Page’s sales growth in nine months of 2021-22 (FY22) on a two-year compound annual growth rate basis is 7.4 per cent, below the 14-18 per cent sales growth reported by peers during the same period.”

On a lower base, Shoppers Stop posted a 34 per cent increase in revenue, indicating that recovery is 95.7 per cent of pre-Covid levels. The sales rebound was aided by easing restrictions and a 65 per cent YoY increase in customer footfall to 10.9 million in the third quarter (Q3) of FY22. The company turned debt free in Q3 and has a cash surplus of Rs 13 crore. PhillipCapital Research has revised its revenue estimates for FY22 and FY23 by 3-5 per cent on continued footfall momentum and sharper recovery.

V-Mart’s performance in Q3 was below expectations. While revenue grew 47 per cent (including the recent acquisitions of value retail chain Unlimited), like-to-like growth at 22 per cent was marginally higher than Covid levels and below Street estimates. Motilal Oswal Research highlights that operating profit grew 16 per cent above pre-Covid levels.

However, adjusting for Unlimited, its revenues were down 9 per cent, while operating profit declined 5 per cent, compared with Q3FY20. These were behind peers possibly due to the pronounced impact on the rural market, along with rising raw material cost, according to the brokerage.

Most retailers indicated that sales in January had been hit by Omicron, leading to a drop in customer footfall. However, the same was offset by online sales and recovery after the initial slump in sales.

The 'Buy' rating of brokerages for ABFRL, Shoppers Stop, and V-Mart is over 60 per cent, driven by growth prospects and reasonable valuations. The 'Buy' calls are the lowest (42 per cent) for Trent, given the valuations concerns, while pace of growth may be the reason why 'Buy' calls did not exceed 57 per cent for Page Industries.