Top picks: Axis Securities prefers Trent and Westlife Foodworld in retail space post Q3 results

Tata Group's Trent and Westlife Foodworld are the top picks of Axis Securities in the retail space post the December quarter (Q3FY24) results.

Retail companies have reported mixed performance, with premium retailers sustaining their growth momentum. However, value retailers continued to face pressure, noted the brokerage. 

It further added that companies have highlighted that rural growth is likely to pick up gradually, led by increased government spending, easing inflation, and higher urban remittances. Moreover, EBITDA margins have faced pressure due to negative operating leverage stemming from subdued topline performance, noted the brokerage.

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"Discretionary demand, particularly in the value segment, continues to be subdued, especially in smaller towns (Tier 2/3/4), which are facing significant pressure. While the premium segment continues to exhibit strength, the value segment, particularly in apparel, remains under pressure. However, Relaxo, within our coverage, has displayed sustained signs of recovery in rural areas. Looking ahead, there is an expectation for volume growth to accelerate in rural regions. Despite the subdued environment, most companies within our coverage universe have either maintained or increased their store opening guidance, particularly as they expand into smaller towns. This strategic move underscores the resilience of their long-term growth prospects," rationaled Axis.

What Makes the Retail Sector a Good Bet?

Rapid formalisation undergoing – As per Axis, the Indian retail market, predominantly unorganized, presents significant opportunities in smaller cities and towns. Rising disposable incomes have fueled consumer preference for branded products.

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Smaller cities provide huge headroom – Smaller cities and towns are experiencing faster growth than metros across various categories such as apparel, QSR, and footwear. This trend is driven by higher aspirations for branded products and increased disposable income in these areas, it stated.

Structural Story to Continue - Axis also pointed out that the average per capita income in India is $2,200, and any increase in per capita income typically leads to higher spending, as the per capita expenditure on essential goods tends to remain constant. Furthermore, Higher disposable income is leading to increased sales of women's wear overall, it added.

Top Picks of Axis Securities in the retail space include:

Trent: The brokerage has a buy call on Trent with a target price of ₹4,050.

"We anticipate robust revenue growth in the upcoming quarters driven by Trent's aggressive store expansion and ongoing efforts to refresh its product offerings, resulting in increased foot traffic. Additionally, the company's progress in enhancing profitability across all formats, narrowing losses at Star Bazaar, and gaining traction in its Inditex joint venture are encouraging developments," it explained.

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Westlife Foodworld: The brokerage has a buy call on the stock with a target price of ₹930.

Axis continues to hold a positive outlook on WFL over the long term. Its confidence in the company's promising future is bolstered by its consistent track record of revenue and EBITDA growth, achieving 17 percent and 51 percent respectively over FY16-20. This growth was fueled by successful new product launches and cost rationalization initiatives, resulting in annual cost reductions of 100-200 basis points. Looking ahead, Axis anticipates WFL to sustain healthy Revenue and EBITDA growth of 15 percent CAGR each over FY23-26E (Post Ind. AS).

"This will be achieved by :

(a) Developing and expanding fast-growing categories such as McDelivery, McCafe, McBreakfast, and Fried Chicken.

(b) Leveraging McDelivery and other convenience platforms to capitalize on the fast-growing delivery channel; and

(c) The Management’s ambitions to penetrate fast-growing smaller cities, raising store guidance to 40-45 stores/year from 25-30 stores previously, and transform regular stores into tech-savvy Experience of the Future (EOTF) stores for a superior customer experience," explained the brokerage.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions