16 October 2020 2QFY21 Results Preview

Consumer Discretionary
No bargains here!
 Recovery rates—a mixed bag: Revenue recovery in 2Q is expected to remain
TP
Prev.
choppy as intermittent lockdowns play spoilt sport. While the Paints and Company RECO
(Rs)
TP
(Rs)
Jewellery categories have nearly hit pre-COVID sales, apparel retail
Avenue
continues to struggle as footfalls remain elusive, with recovery rates ranging REDUCE 1,850 1,800
Supermarts
from 30-60%. Grocers, especially the online ones, continue to do well, as Titan SELL 1,050 950
consumers prefer convenience over value. Losses across the board are ABFRL ADD 130 120
ebbing. However, for apparel retailers, profitability improvement remains Trent SELL 500 490
on crutches (rental concessions and salary cuts). In this backdrop, assessing STOP REDUCE 170 170
(1) foregone vs recoverable revenue, (2) inventory position, (3) update on TCNS Clo. REDUCE 370 390
rental negotiations and (4) leverage position remain key.
V-MART ADD 1,850 1,800
 Jewellery—hits near pre-COVID sales: Volumes continue to languish Asian Paints REDUCE 1,800 1,800
courtesy elevated gold prices (+40%). However, recovery in value growth is
Berger Paints SELL 460 460
encouraging. Most big-box jewellers’ sales are expected to decline by 0 to -
Kansai Nerolac ADD 500 500
10% in 2Q (channel checks). Assessing ex-pent up demand remains key.
Margins are likely to be weak due to inferior product mix.
 Increasing competitive intensity palpable among grocers: Grocers continue
Changes in recommendations
to slug it out to capture a share of the rising online F&G pie (catalysed by the
New Earlier
pandemic). JioMART’s May launch has heightened competition. Along with Company
RECO RECO
intermittent lockdowns, this could impact footfalls for prominent offline
Avenue
discounters like DMART. Margins could be lower than usual as low-margin REDUCE SELL
Supermarts
essential purchases will continue to dominate the grocery basket in 2Q. Titan SELL REDUCE
 Apparel recovery remains choppy: Realisations may be weak for most Trent SELL ADD
apparel retailers as this is an EOSS quarter—recovery rates of our universe V-MART ADD BUY
range from 30-60% of pre-COVID levels. Moreover, inventory for almost all
has deteriorated since Mar. Hence, the ask from festive throughput remains Coverage Withdrawal
high. While losses may ebb QoQ as stores are now open, the trajectory of
Company
rental savings could come off directionally, and footfalls are yet to impress.
 Paints lead in recovery: Paint firms have hit 100%+ of pre-covid sales as Future Retail
they focus on the less-impacted tier 3/4 cities, low-end emulsions, primers Future Lifestyle Fashions
and putty. The revenues of Top-3 may grow by 2-5%. Margins may expand Arvind Fashion
260-290bp YoY as benign RM-led GM gains trickle down the P&L.
 No bargains in the space: While stocks have recovered from their Mar lows,
one would be jumping the gun to call out a secular recovery just yet,
especially in apparel. Upgrades: Avenue Supermarts (SELL to REDUCE),
Downgrades: Titan (REDUCE to SELL), Trent (ADD to SELL) and V-
MART (BUY to ADD).
1QFY21 Sales Gr (%) 2QFY21 Sales Gr (%)
20 4 5 2
-
(2) (4)
(20) (10)
(18) Jay Gandhi
(40) (34)
(43) (46) (42) (40) jay.gandhi@hdfcsec.com
(60) (55)
(59) (62) +91-22-6171-7320
(80) (66)
(70)
(85) (84)
(100) (87) (94) (88)
STOP
Titan

V-MART
KNPL
BRGR
APNT

DMART

TCNS Clo.
ABFRL

Reliance Retail
Trent

Varun Lohchab
varun.lohchab@hdfcsec.com
+91-22-6171-7334

HSIE Research is also available on Bloomberg ERH HDF <GO> & Thomson Reuters
2QFY21 Results Preview

Retail
2QFY21E
COMPANY WHAT’S LIKELY KEY MONITORABLES
OUTLOOK

 The pandemic continues to remain harsh on the  Sales velocity and margins.
discounter with 1. Intermittent state lockdowns
playing the spoilt sport, 2. JioMART remaining  Pace of network expansion
aggressive on pricing as well as delivery options.  Commentary on COVID-led
recovery
 Expect D-MART to add 2 stores (net) in 2Q an SSSG
of -12%. Building in revenue per sq. ft of Rs. 26k.  Progress on Online strategy.
Avenue
Supermarts
WEAK  Gross margins (GMs) however are likely to improve
sequentially as high GM non-essentials.commenced
in 2Q. Expect GMs to improve 40bp to 14.1% QoQ
Building in recovering profitability (EBITDAM 5.7%
in 2QFY21 vs 2.8% in 1Q and 8.7% in 2QFY20)
 While recovering, net profits are still likely to fall
short YoY at Rs. 1.92bn.

 Titan’s recovery has been better-than-expected. We  Sept sales have come off again;
expect net revenue to decline by 2%. Overall EBIT hence commentary on recovery
margin to come off by ~230bp YoY at 7.3% is key and consumer sentiments
 Jewellery revenue grew 8.7% YoY (consol) which  Outlook on Watches and
includes a Rs. 3.9bn excess gold inventory sale. Ex- Eyewear businesses
that, Jewellery sales have hit near 98% of the base
Titan GOOD  Jewellery business EBIT margin
quarter in 2Q. Our forecasts models a 25% decline in
volumes. Expect Jewellery EBIT margins to decline  Sept sales have come off again;
190bp YoY to 8.5%. hence commentary on recovery
is key
 Watches and Eyewear have recovered to 55/58% of
Pre-COVID sales resp.  Inventory levels and capital base
movement in Jewellery

 Expected to be among the better-placed apparel  Commentary on Inventory

retailers to chart the recovery path given its levels and revenue ramp-up
pervasive price points.
 Rental savings
 We expect revenue to recover back to 58% of Pre-
COVID sales (-42% decline YoY vs 87% decline in
1QFY21 and +33% in 2QFY20).

Trent WEAK  Our forecasts build in 51/90% revenue recovery YoY

for Westside and Zudio resp.
 Expect a 280/410bp decline in Gross/EBITDA
margins (45/12% resp) courtesy 1. Unfavourable
operating leverage, However, the sequential
recovery is likely to be amongst the sharpest in
apparel retail as some part of inventory provisions
are likely to be written back

Page | 2
2QFY21 Results Preview

2QFY21E WHAT’S LIKELY KEY MONITORABLES

COMPANY
OUTLOOK
 Given exposure to high-price point brand biz in  Commentary on supply chain
Madura and high formal apparel exposure, ABFRL’s recovery
recovery is likely to be arduous.
 Outlook on industry discount
 We expect revenue to decline by 55% YoY (+15% in levels post COVID-19 lockdown
2QFY20 and -85% in 1QFY21).
 Inventory and creditor levels
 Expect Madura to decline by 59% YoY underpinned
mainly by the decline in Lifestyle brands. Innerwear  Trajectory of rental savings.
growth, too, is expected to moderate (run-rate
ABFRL WEAK basis). Pantaloons expected to decline by 50%.
Monthly recovery run-rates for both biz remain
encouraging though.

 EBITDA losses (Rs. 1.46bn) are likely to more than

halve QoQ as lockdown led losses in 1Q mean
revert.

 While the recent fund raise via rights issue helps,

inventory-led right-offs, if material could soak some
of these funds.

 Given the Tier3/4 focus and its value fashion  Commentary on supply chain
positioning, V-MART is likely to clock the sharpest recovery
recovery in our apparel retail universe.
 Outlook on industry discount
 We expect revenue to hit 60% of Pre-COVID sales as levels post COVID-19 lockdown
consumers return to stores for their need-based
purchases. Avg order values and Articles per order  Inventory and creditor levels
remain high, implying, footfall recovery remains  Trajectory of rental savings.
lower than revenue recovery.
V-MART GOOD
 Building in 2 store additions for the quarter.

 Expect V-MART to nearly touch EBITDA break-even

for the quarter as revenue recovery starts absorbing
fixed cost in the biz. Building in net losses of Rs.
~300mn in 2Q

 Channel checks suggest inventory levels remain

higher than March (We build in a Rs. 4.9bn
inventory pile for 1HFY21).

 Recovery for TCNS has remained amongst the  Outlook on industry discount
weakest within our universe. We build in a decline levels post COVID-19 lockdown
of 66% YoY in 2Q as intermittent state lockdowns
impact footfalls. We build in revenue declines of  Inventory and debtor levels
across -75/-75/-80/0% EBOs/LFS/MBOs/Online  Commentary on rental re-
channels resp. negotiations
 Inventory is expected to be higher than the already  Strategy on liquidating
TCNS Clothing WEAK elevated March levels. Ergo, pricing power during inventory without material
the unlock phase and leading to the festive season is write-offs
expected to be weak.

 We expect gross margin to decline 15pp to 50% as

TCNS is likely to grapple with higher inventory
provisions and discount levels in 2H.

 Building in net losses of Rs. 362mn in 2QFY21

Page | 3
2QFY21 Results Preview

2QFY21E WHAT’S LIKELY KEY MONITORABLES

COMPANY
OUTLOOK
 Given STOP’s predominant mall-based presence  Outlook on industry discount
(malls being the most impacted by the pandemic), levels post COVID-19 lockdown
revenue recovery is likely to be the weakest in peer-
set  Working capital
 Commentary on rental re-
Shoppers Stop WEAK  We expect revenue decline of 70% YoY in 2Q (vs -
negotiations
94% in 1Q and -2% in 2QFY20).
 Strategy on liquidating
 We build in Rs. 304mn net losses in 2QFY21 vs PAT
inventory without material
of Rs. 1,372mn in 2QFY20
write-offs

Paints
2QFY21E WHAT’S LIKELY KEY MONITORABLES
COMPANY
OUTLOOK
 We expect a full recovery in the anchor biz -  Recovery trajectory in October
decorative paints in 2Q (and ~10% volume growth
(vs ~38% decline in 1Q).  Rebating and discounting trends

 Channel checks suggest that East followed by North  Dealer addition trajectory
and South have progressively picked up while West
lags the recovery curve.

 Value will continue to lag volume as the focus on

Asian Paints utilising capacity via aggressive push in Economy
emulsions, primer, and putty continues. We build in
10/-5% volume growth /realisation decline in 2Q.

 Expect a 1% growth in subsidiaries led by a recovery

in Indonesia.

 EBITDA margins are likely to improve 260bp YoY as

GM expansion trickles down and A&P and other
SG&A expenses are reined in.

 Berger to marginally outpace APNT given its higher  Recovery trajectory in October
exposure to the less impacted Tier 2/3 and
North/East focus.  Rebating and discounting trends

 We build in ~5% YoY growth in standalone biz. (+9/-  Dealer addition trajectory
4% volume/realization growth)

 The contribution of STP acquisition would

marginally aid consolidated performance.
Berger Paints
 GMs are likely to improve QoQ as high-cost
inventory in 1Q normalizes. We expect a 170bp GM
improvement QoQ to 41.7%.

 EBITDA margin expansion is likely to be ahead of

GM expansion (240bp YoY at 18.1%) underpinned
by GM savings and controlled A&P, and other
SG&A spends. Net profit decline of 7.5% is due to
lower tax rate in the base quarter. (ETR 6.2%)

Page | 4
2QFY21 Results Preview

2QFY21E WHAT’S LIKELY KEY MONITORABLES

COMPANY
OUTLOOK

 We model a 2.5% top-line growth underpinned by a  Recovery trajectory in October

4% YoY growth in decorative biz and a flat
Industrials growth.  Rebating and discounting trends

 Note: Growth in decorative paints comes off a weak  Dealer addition trajectory
base as KNPL’s top-line was impacted due to the
J&K curfew following revocation of Article 370 in
Aug 2019 in the base quarter (A key catchment). We
estimate +8%/-4% volume/realization growth in
decorative biz. Auto coatings segment is likely to
Kansai Nerolac
recover mimicking that of the client base.

 As mix normalises towards Industrials (Low GM

biz), GMs are likely to contract. Building in 120bp
contraction/210bp expansion to 40.5% QoQ/YoY
resp.

 Expect healthy EBITDA margin expansion QoQ and

YoY (21.5%, up 290bp YoY) as recovery-led
operative leverage kicks in

Estimate Changes
Avenue Supermarts
FY21E FY22E FY23E
(Rs mn) Change Change Change
New Old New Old New Old
(%) (%) (%)
Revenue 249,353 259,978 (4.1) 351,654 349,596 0.6 351,654 349,596 0.6
Gross Profit 35,710 36,440 (2.0) 52,741 52,434 0.6 52,741 52,434 0.6
Gross Profit Margin (%) 14.3 14.0 30 bps 15.0 15.0 (0 bps) 15.0 15.0 (0 bps)
EBITDA 18,001 18,940 (5.0) 30,414 30,279 0.4 30,414 30,279 0.4
EBITDA margin (%) 7.2 7.3 (7 bps) 8.6 8.7 (1 bps) 8.6 8.7 (1 bps)
APAT 11,755 12,800 (8.2) 20,418 20,716 (1.4) 20,418 20,716 (1.4)
APAT margin (%) 4.7 4.9 (21 bps) 5.8 5.9 (12 bps) 5.8 5.9 (12 bps)
EPS (Rs) 18.1 19.8 (8.2) 31.5 32.0 (1.4) 31.5 32.0 (1.4)

The Titan Company

FY21E FY22E FY23E
(Rs mn) Change Change Change
New Old New Old New Old
(%) (%) (%)
Revenue 181,434 170,417 6.5 248,819 231,087 7.7 295,232 274,337 7.6
Gross Profit 44,814 42,093 6.5 66,447 61,712 7.7 78,709 73,138 7.6
Gross Profit Margin (%) 24.7 24.7 0 bps 26.7 26.7 - 26.7 26.7 (0 bps)
EBITDA 15,059 14,451 4.2 27,233 25,293 7.7 32,653 30,342 7.6
EBITDA margin (%) 8.3 8.5 (18 bps) 10.9 10.9 (0 bps) 11.1 11.1 (0 bps)
APAT 7,560 7,257 4.2 16,765 15,809 6.0 20,810 19,685 5.7
APAT margin (%) 4.2 4.3 (9 bps) 6.7 6.8 (10 bps) 7.0 7.2 (13 bps)
EPS 8.5 8.2 4.2 18.9 17.8 6.0 23.4 22.2 5.7
Source: HSIE Research

Page | 5
2QFY21 Results Preview

Financial Summary
NET SALES (Rs bn) EBITDA (Rs bn) EBITDA margin (%) APAT (Rs bn)
Company 2Q QoQ YoY 2Q QoQ YoY 2Q QoQ YoY 2Q QoQ YoY
FY21E (%) (%) FY21E (%) (%) FY21E (bps) (bps) FY21E (%) (%)
Food & Grocery
Avenue Supermarts 53.4 39.3 (10.2) 3.1 182 (40) 5.7 291 (291) 1.9 NM NM

Jewellery
Titan 45.7 130.8 (2.0) 4.3 NM (18) 9.3 NM (185) 2.3 NM NM

Apparel
ABFRL 10.4 224.9 (55.0) (1.5) NM (143) (14.1) NM (2,876) (3.1) NM NM
Trent 4.7 389.8 (42.3) 0.6 NM (57) 12.2 NM (409) (0.3) NM NM
STOP 2.5 370.3 (70.0) (0.3) NM (122) (12.0) NM (2,823) (0.7) NM NM
TCNS Clothing 1.1 238.8 (65.8) (0.4) NM (156) (33.0) NM (5,328) (0.4) NM NM
V-MART 1.9 141.5 (40.0) - NM (100) - NM (360) (0.3) NM NM

Paints
Asian Paints 52.4 79.2 3.7 11.3 133.0 18 21.5 497 264 7,254 230 (14)
Berger Paints 16.8 80.7 5.2 3.0 230.4 21 18.1 820 238 1,800 1,093 (8)
Kansai Nerolac 12.7 112.9 2.4 2.5 216.0 19 20.0 652 286 1,770 315 (8)

Valuation Summary
Mcap EPS (Rs) P/E (x) EV/EBITDA (x) Core ROCE (%)
CMP TP
Company (Rs Reco.
(Rs) (Rs) FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E
bn)
Avenue Supermarts 1,247 1,975 REDUCE 1850 18.8 32.7 39.1 104.9 60.4 50.5 69.2 40.9 32.2 12.4 19.3 19.5
Titan 1,089 1,231 SELL 1050 8.5 18.9 23.4 146.7 66.1 53.3 76.1 42.2 35.2 7.8 15.6 17.5
ABFRL 104 135 ADD 130 -10.9 -6.1 -5.5 -11.8 -21.0 -23.2 -380.6 13.0 10.9 -24.3 -5.7 -6.3
Trent 235 663 SELL 500 0.3 3.4 3.3 NM NM NM 59.0 39.5 34.7 2.9 5.8 5.7
STOP 15 173 REDUCE 170 -14.3 -4.3 -1.2 NM NM NM -31.1 8.5 6.2 -18.2 -7.1 -2.3
TCNS Clothing 23 379 REDUCE 370 -10.3 8.0 10.5 -33.2 42.7 32.6 -19.9 25.1 17.5 -22.9 10.4 12.7
V-MART 35 1,931 ADD 1850 20.9 43.3 53.3 85.3 41.3 33.5 36.4 21.9 17.7 8.4 17.6 19.2
Asian Paints 1,993 2,078 REDUCE 1800 25.2 33.4 37.7 77.5 58.6 51.9 48.0 38.0 34.5 23.5 31.5 35.0
Berger Paints 587 606 SELL 460 6.0 7.9 8.9 100.0 76.2 67.6 60.5 47.2 41.7 17.6 21.5 22.1
Kansai Nerolac 264 490 ADD 500 7.9 10.6 11.9 61.9 46.4 41.2 36.6 28.6 25.4 10.7 13.8 14.0
Source: HSIE Research

Page | 6
2QFY21 Results Preview

Rating Criteria
BUY: >+15% return potential
ADD: +5% to +15% return potential
REDUCE: -10% to +5% return potential
SELL: > 10% Downside return potential

Disclosure:
We, Jay Gandhi, MBA & Varun Lohchab, PGDM, authors and the names subscribed to this report, hereby certify that all of the views expressed in this
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conflict of interest.
Any holding in stock –No
HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475.

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