Q2 preview: Discretionary spending to make a comeback, retail back on track

The onset of the festive season and waning of the second wave of Covid-19 is expected to bring much-needed cheer to the consumer and retail sectors. According to quarterly updates by Titan Company Ltd and Kalyan Jewellers as well as analysts tracking the sectors, pent-up demand is expected to drive discretionary spending.

Companies operating in the segments are expected to report a strong recovery in the quarter ended September.

“The second quarter is likely to report strong cumulative growth numbers – about 15 percent on the topline, about 10 percent on EBITDA, and about 10 percent on PAT – for the 18 consumer companies under our coverage. This is on a cumulative base of 5.4 percent and 7.3 percent in sales and EBITDA, respectively, in 2QFY21. A large portion of this growth is likely to come from pent-up demand for discretionary products,” Motilal Oswal Institutional Equities wrote in a recent note.

EBITDA is short for earnings before interest, taxes, depreciation and amortisation. PAT stands for profit after tax.

Retailers are also expected to have clocked strong recovery during the quarter after the second wave derailed the growth in the June quarter of the 2022 financial year.

According to a note by financial services firm Edelweiss, the second quarter is expected to have seen a sharp recovery across segments.

“Provided there is no third COVID wave, this should set the base for strong growth in the upcoming festive period,” it added.

Non-essential items back in consumer baskets

Jewellery retailers such as Titan Company and Kalyan Jewellers have reported strong revenue growth in the quarter gone by in their quarterly updates as consumers adjusted to the post-COVID era new normal. Kalyan Jewellers logged 60 percent revenue growth in the second quarter for its India operations compared to a year ago.

“We saw continued robust momentum in both footfalls and revenue across all our markets in India and the Middle East in Q2 of FY22. There has been a greater acceptance of the new normal, leading to increased walk-ins and more time spent at our showrooms by customers,” the company said in a quarterly update.

Kalyan Jewellers said non-south markets recorded higher same-store sales growth of 70 percent compared to south markets, which recorded same-store sales growth of about 40 percent.

“This differential was predominantly due to the temporary closure of showrooms in Kerala during the recent quarter. Our overall same-store sales growth in India during the quarter was around 50 percent,” it added.

Titan Company, similarly, recorded 78 percent year-on-year (YoY) growth during the quarter for its jewellery business under the Tanishq brand. “The demand postponement triggered by the second wave of the pandemic in avenues like gift purchases, occasions. milestone buying, weddings, investments in gold etc. witnessed a strong comeback in Q2,” it said.

The company also reported robust recovery in other discretionary categories such as watches and wearables (73 percent YoY) and other businesses such as fragrances and ethnic retail.

Motilal Oswal Institutional Equities expects improved demand for discretionary and out-of-home categories at Hindustan Unilever Ltd to log report 10 percent YoY sales growth (6 percent volume growth) and 8.5 percent/7.2 percent EBITDA/PAT growth.

According to the brokerage, ITC Ltd, too, will post 15.5 percent overall sales growth, with 12 percent volume growth in cigarettes. It said Varun Beverages and United Breweries are likely to report strong YoY revenue growth in Q2 (56 percent/19 percent), riding in discretionary spending.

Festive fillip for retailers

Besides jewellery, other retailing categories such as apparel and, quick services restaurants are also expected to have witnessed sales recovery during the past quarter.

Jubilant FoodWorks, which had registered 94 percent system-wide sales recovery in Q1FY22, according to Edelweiss Securities, is likely to report 102-105 percent growth.

“Even other QSR players are close to achieving full sales recovery—Burger King India had touched a recovery of 92 percent by July-21 and Westlife Development clocked 100 percent recovery in all drive thru and high-street stores in July,” it added.

The brokerage expects apparel retailers to clock overall recovery of around 80 percent (ex-Madura) with Trent again expected to clock industry-leading 90 percent recovery, driven by traction from Zudio with easing of lockdown restrictions and most stores being operational.

“With limited traction from athleisure, we expect Page Industries to report 5 percent YoY growth in revenue (flat versus Q1FY20),” said Edelweiss Securities.

Inflationary pressure

In essentials categories, inflation will continue to play the spoilsport as fuel, edible oil and raw material prices continue to be volatile.

“All companies have taken price hikes, but we still expect gross margins of most companies to dip YoY. Most companies are likely to increase ad spends YoY (especially Tata Consumer Products or TCPL); thus, YoY EBITDA margin compression is likely as many costs are coming back,” said Edelweiss Securities.

Motilal Oswal Institutional Equities also warns of inflationary pressure on margins. According to the brokerage, the prices of non-agri commodities remain elevated and crude prices have continued to surge 69.5 percent YoY and 5.5 percent sequentially.

“HDPE/LLP costs – which affect packaging and hair oil companies – have also increased 22.7 percent/32.7 percent YoY, but remain stable on a sequential basis. Palm oil prices remain near the peak of May’21 (average prices up 59 percent YoY / 5.2 percent QoQ) and are likely to impact Hindustan Unilever, Godrej Consumer Products, and Tata Consumer Products (to some extent),” it added.

HDPE is short for high-density polyethylene and LLP for light liquid paraffin oil.

Companies such as Marico and Godrej Consumer Products (GCPL) cautioned about stressed margins on account of high input costs in their quarterly updates.

“Among key inputs, copra prices corrected further, crude remained firm, while edible oil prices oscillated at higher levels. Gross margin is expected to improve marginally from the previous quarter but will be under pressure on a year-on-year basis due to much higher input costs over the last year. Operating margin is also expected to contract on a year-on-year basis given the arithmetic effect of significant pricing growth in the topline. As a result, the company expects modest bottom-line growth in the quarter,” Marico said a quarterly update.

Marico’s revenue growth in the quarter was in the low twenties, with volume growth close to double-digits on a two-year compound annual growth rate basis. GCPL expects close to a double-digit sales growth in India, driven largely by volume growth and calibrated price increases.

“We expect our 2-year CAGR to be in the double digits,” the company said.

Analysts expect the staples and essentials category to post moderate growth during the quarter as the second wave of the pandemic subsides.

“We expect staples to report a slight moderation in growth and muted earnings on account of margin pressures and as COVID-19 tailwinds for health and hygiene categories fade,” said Emkay Global Financial Services in a preview report. “Marico is expected to report strong topline growth, led by pricing and steady volumes; however, earnings will be muted on lower margins. We expect Hindustan Unilever, Nestle, Dabur and ITC to report double-digit EBITDA growth,” it added.