Prefer Aditya Birla Fashion, Future Retail: Himanshu Nayyar

Himanshu Nayyar, VP-Consumer & Retail at Systematix Shares & Stocks told CNBC-TV18, "We have initiated coverage on the retail sector. We believe in the current environment where investors are hungry for growth, modern retail sector is one which gives you that. Within that, our top picks would be companies in branded apparel and the food and grocery retailers. So, two stocks which we are pushing right now are future retail on the food and grocery side. Aditya Birla Fashion on the branded apparel side.

"Future Retail had a very difficult past and last year, after the restructuring that they did where they disposed of all their non-core assets is now India's top pure play retail company which is asset light and does not have any fixed asset backlog. So, they own the top brands in the country like Big Bazaar, Fashion at Big Bazaar and the recently acquired EasyDay chain of convenience stores." 

"Now it is a two pronged story here. One is very strong, 20 percent plus topline growth is possible given that if you see their presence, they are still in the top 20-25 cities of the country in a big way. They are looking to massively increase their distribution and secondly, on the margin front, they are just at about 3.3 percent margins. So, there is a huge potential to move up these margins, how that will come, the biggest driver would be increase in the share of their own brands, the private label brands on the food and groceries side. So, they will be introducing a number of new brands from their sister concern, Future Consumer which will drive up margins." 

"Secondly, on the apparel side, they are doing very well under the Fashion at Big Bazaar brand where the premiumisation theme is playing out, the positioning is in the premium. So, there again, I see a significant margin improvement. So, a combination of these two things over the next two years can drive a 45-50 percent compounded annual growth rate (CAGR) in earnings. And even if you look at valuations compared to Avenue Supermarts (D-Mart), they are trading at about a 40 percent discount on FY19 multiples," he added.