The pandemic, which had brought the whole world to a standstill, is seen slowly waning away. The third wave, which had gained momentum in India during the end of 2021, peaked out by the end of January and beginning of February 2022. The central government is also now urging states to remove all pandemic restrictions thereby giving room for all sectors to run full throttle and contribute to the growth of the Indian economy.
As we move back towards normal, SBI Securities in its report highlights that the Indian economy has bounced back smartly and certain high frequency indicators confirm the same.
The report states that after the first wave, GDP expanded for the fourth straight quarter year on year. It pegs the FY22/FY23 growth at 9.2 and 7.8 percent respectively. The manufacturing and services PMI has remained above 50 after the second wave, which denotes expansion.
The report said that the Index of Industrial Production (IIP) and eight-core industries growth recovered sharply after the first wave as minimal localised lockdown restrictions were imposed. Further, the rail freight and port cargo traffic had fallen sharply as a consequence of complete lockdown during the first wave but improved as the economy gradually opened up. After that, the impact on freight has been very negligible.
India’s merchandise imports and exports saw a significant upsurge indicating robust domestic and international demand revival. Both imports and exports of merchandise hit record high levels in December 21, data showed.
SBI Securities sees an uptick in net payroll additions.
All the recovery in economic indicators is reflected in robust Goods and Services Tax collections. According to the report, GST collections crossed Rs 1.3 trillion (lakh crore) mark for the fourth straight month in January 2022; lowest GST collections in the second wave stood at Rs 0.9 trillion (June 2021) as compared to Rs 0.3 trillion in the first wave (April 2020).
Given the positive signals from high frequency economic indicators, the brokerage is particularly bullish on certain sectors and has identified a few stocks from these themes that can generate healthy returns over a 12 month horizon.
Multiplex business
PVR Ltd and Inox Leisure Ltd witnessed handsome recovery in footfall given the less restrictive operating environment in the December 2021 quarter. Footfall is likely to surpass pre-pandemic levels once restrictions are fully lifted by the end February 2022 or early March 2022. The average ticket price (ATP) and spend per head (SPH) have gone above pre-pandemic levels which indicates better pricing power for both PVR and Inox.
“As the business environment improves, we expect advertisement spend by corporates to come back with full vengeance; likely to drive operating leverage during FY23 and FY24,” the brokerage said in its report. Both the companies have strong balance sheets despite subdued business operations.
As of September 2021 quarter, PVR net debt/equity stood at 0.6x and Inox was debt free. The brokerage expects that a smooth way forward for both the players will drive screen additions.
“Overall, during FY22-FY24 period, we expect PVR and Inox to post double digit earnings growth, clock double digit return ratios and turn free cash flow positive,” SBI Securities added in its report.
Travel business
Air traffic was severely impacted due to the pandemic, but things were looking better in the first nine months of FY22 with 103% year on year growth to 132 million. As travel restrictions ease, sales of the luggage industry are expected to revive in line with recovery in passenger air traffic.
“Directionally growth in sales of luggage industry is linked to growth in India’s passenger air traffic,” the report highlighted. VIP Industries and Safari can benefit in a big way as passenger traffic picks up.
Strong revenue recovery for hotel players is likely with increasing occupancy. Structural cost reductions coupled with lean balance sheet are expected to return double digit earnings growth for the industry.
The brokerage sees VIP Industries as the best business to ride on the growth story of travel business. Passenger rail ticket booking is witnessing healthy traction because of which IRCTC, India’s largest rail ticket booking platform, is a potential beneficiary. “Likely recovery in leisure travel and footfall in amusement parks after normalisation will benefit Mahindra Holidays and Wonderla,” the brokerage added in its report.
Fashion, QSR and fine dine
Same-store-sales growth (SSSG) for quick service restaurants (QSRs) and fine dine restaurants has fared well so far in FY22 while new store addition is beginning to pick up pace. The addition of departmental and fashion stores is also seen gaining momentum with companies like TCNS Clothing adding 81 stores in the third quarter of FY22.
“All key operating metrics across consumer sectors like QSR, fine dine, apparels, fashion, amusement parks, jewellery, etc., are indicating revival in discretionary consumption,” the report said.
In addition, management commentary for the third quarter of FY22 reveals that for a majority of the players sales have rebounded to pre-COVID levels and in some cases exceeded them.
The brokerage suggests that Jubilant Foodworks and Sapphire Foods in QSR/fine dine and TCNS Clothing in fashion are potential beneficiaries of the revival in this segment. Sapphire Foods, which operates restaurants under three of Yum’s brands – KFC, Pizza Hut and Taco Bell in India, Sri Lanka, and the Maldives – reported highest ever quarterly restaurant sales across KFC, Pizza Hut and Sri Lanka business in the third quarter of FY22.
Jubilant Foods added highest ever 75 stores in the third quarter of FY22. “We believe rapid store expansion coupled with likely strong SSSG momentum will be revenue and earning accretive in the medium to long term,” the report suggested.
Commercial rentals
The brokerage sees recovery in the office market amid positive sentiments given vaccination ramp-up, resumption of business activities and continued strong hiring by corporates.
The demand for retail space is likely to gain traction in 2022 as consumption in malls has recovered to pre-COVID levels.
“We expect office rental to pick up as occupancy level is now approaching pre-COVID levels due to revival in sentiments, increased outsourcing and robust hiring,” said the brokerage.
It is particularly positive on NESCO Ltd. The firm’s exhibition and catering business which account for nearly 40 percent of sales dropped to nine percent of sales during FY21. “The first nine months of FY22 are showing early signs of recovery which is likely to continue in FY23 as well,” the report added. Its IT park showed resilience despite three waves of the pandemic with 75-80 percent occupancy and it plans to spend Rs 1,800 crore over the next five years on developing more IT parks.
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