Investors could use dips to buy expensive retail stocks, say analysts

Topics retailers

The lower share of organised retailers in the overall retail market and across various categories itself indicates the potentially large room for growth
The share price of many retailers, and across categories such as apparel, footwear, jewellery, grocery, etc, have gained significantly in the recent past, with some also near their all-time highs. While a part of this is due to corporate tax rate cuts announced recently, it is also due to the government’s efforts to boost economic activity, companies’ initiatives/potential to expand and grow fast, and better use of capital. Although some of the factors such as market penetration may play out over time, there is little doubt that the organised retailers seem to be in a sweet spot, given their long-term growth prospects.

Firstly, the lower share of organised retailers in the overall retail market and across various categories itself indicates the potentially large room for growth. And, the improvement in the penetration levels shown in the past means the companies are on the right track.

For instance, the penetration of organised retailers in the jewellery and watches segment rose to 28 per cent in 2017, from just 6 per cent in 2007 and the count is estimated to reach to around 35 per cent by 2021. So, apart from the usual growth in the market size, garnering market share would mean high growth rates for organised retailers. Other categories such as food and grocery, apparel, footwear, etc, too, show similar trends (refer table). Notably, in apparel, jewellery, and footwear, organised retailers are estimated to garner sizeable market share of 34 per cent and above by 2021. This should go well for the listed players such as Titan, Bata, Trent, and Aditya Birla Fashion and Retail (ABFRL), among others.

Apart from company-specific initiatives, some macro factors, too, should help retailers corner market share. Besides the goods and services tax, the changing buying pattern of Indian consumers is a blessing for the organised and large retailers.

According to Ankit Kedia, vice-president, Phillip Capital, customers’ preference for modern store experience and digitisation should be important supporters for the growth of organised retailers, and over the next three-five years, customer experience will overtake price and product as key differentiators for retailers.

Not only in metros or urban areas, the investment in technology through e-commerce channels would help the organised players improve their footprint in tier 2 and tier 3 cities. This is because, e-commerce transactions from tier 2 cities and beyond are growing 3x faster than those in metropolitan cities, making this a huge untapped market for the next growth phase, notes Phillip Capital.

Most of the listed players are also enhancing their focus on omnichannels (multichannel approach that includes online and offline) to improve customer experience and sales. Bata, for instance, is one player reaping such gains.

Notably, customers are nowadays also ready to increasingly spend towards discretionary items, which pave the way for retailers. Analysts at Prabhudas Lilladher, quoting McKinsey, in a recent report, state that the share of discretionary in the total household spending has been rising continuously. From 52 per cent in 2005, the share of discretionary spending has increased to 61 per cent in 2015 and is expected to rise further to 70 per cent by 2025.

This apart, a lower tax is expected to provide good impetus to retailers’ operating cash flow (if the companies retain the tax savings) or growth rates (if tax savings are passed on). According to 2018-19 numbers, the effective tax rate of many listed retailers was over 31 per cent.

The caveat, however, is the pricey stock valuations. Many players are currently trading 10-49 per cent premium to their respective historical long-term average valuation. Priyank Chheda, analyst at Reliance Securities, believes the expensive valuation could limit the (near-term) upside in the stocks, though the long-term growth potential of the retailers remains intact.

In the last one month, stocks of major retailers surged 9-25 per cent, outperforming the BSE Sensex that rose by 4 per cent during the same period.

Thus, corrections would provide a good buying opportunity for long-term investors. Bata, Titan, ABFRL, and Trent are top long-term picks of analysts.

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