Retail Sector Results Preview: Q3FY13

The retail space was in the buzz for the past 6-8 months on the back of hopes of a positive hearing from the government on the reforms front. Finally, in Dec 2012, the Parliament approved the bill for FDI in multi-brand retail to the extent of 51%, which was a much-awaited positive move for the retail space. The bill was not only passed in the Lok Sabha but also has received a nod from the Rajya Sabha.

In addition to this, the festive season in the Dec quarter was also a major positive for the companies. During the festive season, consumers usually have higher disposable income and this change in sentiments results in good business growth for the companies.

The resultant sense of optimism has helped the retail stocks to perform extremely well during the Dec 2012 quarter. During the period, Pantaloon Retail was up around 22%, Shoppers Stop by 18% and Titan was higher around 10%. However, we believe that the actual flow of funds into the space would take atleast a couple of quarters.

For the quarter, an aggregate topline growth of around 13%-15% on a YoY basis may be seen in the space. Previously, Govind Shrikhande (Customer Care Associate & Managing Director) of Shoppers Stop had expressed his views on Diwali sales saying, “It's definitely going to be a more buoyant Diwali than last year, as consumer sentiments are much more positive. Generally the East sparks off the festive shopping season with Durga Pujo. This year, the east has shown good growth; followed by October which has also been a good month. This indicates that the festive season will move us towards an 8%-10% like-to-like growth”.

In case of Pantaloon Retail, the same store sales growth (SSSG) for the lifestyle segment may continue witnessing double-digit growth (Sept quarter growth was 10.8%), while the growth in the value and home retail segment may once again be muted on a YoY basis (In Sept 2012, growth was at 0.2% and 3.5% respectively).

The higher margin apparel segment is expected to see double-digit growth (around 10%-12%). However, the benefit of the same would probably not be seen in the EBITDA margins of the companies, as rising rentals are playing spoilsport. The EBITDA margins are expected to remain almost stable on a sequential basis, at around 12%-13%.

Overall, we believe that the companies would post decent growth in terms of topline in the Dec quarter of 2012, but would continue to face headwinds in terms of bottomlines, majorly due to the higher interest outgo.

We believe that with interest rate expected to soften from the March 2013 quarter and with the FDI bill getting the green signal, the retail sector would be in focus going ahead. Further, the entry of foreign players (for instance, the talks of IKEA planning to enter India) could also be seen in the upcoming quarters. The entry of foreign players would result in healthy competition and ensure that managements are on their toes and run the business efficiently.

We would update our readers about the companies’ performance in the Dec quarter. Watch this space for more.