Unlock rally in hotels, multiplexes and retails stocks may fizzle out

What is still keeping recovery outlook of these sectors gloomier is expected delay in normalising of consumer behaviour and income uncertainty
While unlocking of the economy is boosting the overall market, it has also improved sentiment towards stocks belonging to sectors such as hotels, retail and multiplexes, which were sharply hit due the pandemic. Many stocks from these sectors have gained 30 to over 100 per cent in the last three months, outperforming the 26.5 per cent rise in the BSE Sensex during the same period.

There is little doubt that things now are not as bad as they were a couple of months back and the market is now looking beyond FY21 earnings. However, the point is whether the current rally is sustainable, given the uncertain situation. Perhaps, not.

According to G Chokkalingam, Founder of Equinomics Research and Advisory: “We believe rally in the stocks like retail, hotel, multiplexes, is unlikely to sustain. Market is ignoring two key aspects one is balance sheet shrinkage due to losses during pandemic period and expected delay in getting back to normal post pandemic period."

Dhananjay Sinha, director and head of institutional research at Systematix Group shares a similar view. “Things might be looking better. But, we believe sectors like hotels, retails, multiplexes, etc. would continue to remain under pressure and would underperform the overall market,” he says. Instead, we would prefer other stocks such as those from banking or automobile ancillary space, where earnings visibility and value addition is relatively better, he added.

What is still keeping recovery outlook of these sectors gloomier is expected delay in normalising of consumer behaviour and income uncertainty. In fact, some experts say even if economy gets fully unlocked, a recovery in economic status of households would not happen immediately. Besides limited social events, people avoiding crowded/public places cannot be ruled out. This would have direct implication on business growth of these sectors, taking a toll on operating leverage and so on overall earnings.
While in case of hotels, even though the lockdown is fully lifted, occupancy improvement would take time. In fact, Archana Gude, analyst at IDBI Capital says, “Earnings visibility is very feeble for hotels, though September quarter would see sequential improvement. So, unless there is earnings sustainability, the hotel stocks are unlikely to get back their valuation multiples.”

For retailers, geographical mix and nature of product portfolio are key deciding factors. For instance, stocks like V-mart would be in a relatively better shape given its higher exposure to semi-urban, rural areas, while companies like Trent and Aditya Birla Fashion and Retail, which have major presence in tier-1/urban areas would continue to feel the pain, opines Akhil Parekh, analyst at Elara Capital. Essential consumer goods companies such as Avenue Supermarts would have lower impact than the one in the apparel/luxury segment.

In case of multiplexes, while some analysts have a positive stance, footfall impact would also stem from rising preference for over-the-top or OTT platforms. Further, a likely delay in content releasing and lower demand for food and beverage segment (over 20 per cent of revenue) are other challenges.

Some analysts believe the smaller/single-screen players, which have large market share and are struggling with liquidity issue in this period, would pave the way for players like PVR and Inox Leisure with relatively faster recovery. The jury, however, is out on this.

Also, many companies in these sectors like multiplexes and retailers have undertaken stringent cost control measures and favourably re-negotiated rental cost. So, to that extent, they could see earnings support. Those that can raise funds quickly should also find some support.

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