Short Call | A tale of two Indias- a rising sun and a waning moon; Britannia, Rategain in focus

Short Call

The July-September earnings season has pulled the elephant in the room right out into the spotlight: urban India’s wallet isn’t as open as it used to be. After propping up growth for sectors like autos and consumer goods, urban India is now hitting the brakes on spending.

Even as lower real salary increases, fading pent-up demand, high interest rates and tight credit conditions break the backbone of urban consumption growth, it’s a different story in rural India. Thanks to lower inflation and a solid monsoon season, rural India is revving up with a refreshing bounce-back in spending. The numbers tell the story: two-wheeler sales are zipping along, fuelled by steady rural demand, but passenger vehicle sales are struggling with a noticeable slowdown in urban demand and heavy discounting.

Now while, Maruti Suzuki, India’s top carmaker, credited rural market for helping hold up its entry-level small car sales, Britannia Industries, which just dropped its Q2 results, made it clear that a sluggish urban market has nibbled away at its earnings growth.

Summing up, Nomura notes that while demand in rural areas and smaller cities (tier 2/3) is steady, metros are seeing a cool-off. The Indian economy may be easing into a cyclical slowdown, and while rural spending is holding its ground, it might not be enough to boost up overall earnings growth for India Inc.

Rategain Travel Technologies (Rs 759, -9%)

Shares plummeted after Kotak Institutional Equities downgraded its rating on the stock to a 'reduce' from the previous 'add' call, citing lofty valuations.

Bull Case: Company continues to expect 150-200 basis point YoY EBITDA margin expansion in FY25. EBITDA margin expanded by 260 bps QoQ to 21.7 percent primarily driven by operating leverage and pruning loss-making accounts in the brand management business. Company reported new bookings at Rs 655 million during September quarter and Rs 1,276 million in H1FY25.

Bear Case: FY25 revenue growth outlook was lowered to 15 percent from 20 percent on loss of a large client, pricing pressures, weak bookings, and normalisation of demand. Management indicated that the September quarter had a 70 percent impact due to lost revenues and expects partial impact in December quarter.

Britannia Industries (Rs 5,027.55, -7.5%)

Reported Q2 earnings which were under expectations.

Bear Case: The rise in prices of key commodities such as wheat, palm, and cocoa, which are key input materials is likely to continue. Geopolitical uncertainties can continue to impact foreign markets. A broad-based slowdown in consumption is impacted urban demand.

Bull Case: The FMCG player is taking price hikes across its portfolio to protect its margins. The rising RM inflation is impacting local, unorganized competition, which will lead to market share gains for Britannia Industries.

(Inputs from Zoya and Neeshita)