Trent, Westlife Foodworld, and Relaxo: Axis picks top retail stocks after Q4 results

Now that the March quarter (Q4FY24) results season is over, brokerage house Axis Securities has picked Trent, Westlife Foodworld and Relaxo Footwear as its top picks in the retail space.

In a review note, the brokerage highlighted mixed performance among retail companies. Premium retailers have maintained their growth momentum, while value retailers are experiencing a gradual recovery and Quick Service Restaurants (QSR) continue to face challenges, it said. Companies expect rural growth to improve gradually due to increased government spending, easing inflation, and higher urban remittances. The brokerage further added that EBITDA margins have been pressured by negative operating leverage stemming from subdued topline performance.

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Axis Securities reported that consumer demand remains weak, particularly affecting the discretionary sector with a significant impact on QSR, although the value segment has shown some recovery. The premium segment continues to perform strongly, whereas the value segment's performance is varied. Despite the subdued environment, most companies in its coverage are maintaining or increasing store opening guidance, focusing on smaller towns, indicating strong long-term growth prospects.

The brokerage further outlined several factors that make the retail sector a strong investment opportunity. The rapid formalisation of the largely unorganised Indian retail market presents significant potential, especially in smaller cities and towns where consumers are increasingly opting for branded products due to rising disposable incomes, it noted.

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These smaller cities are growing faster than metros across various categories like apparel, QSR, and footwear, driven by higher aspirations and increased disposable incomes, further said the brokerage. It expects the sector's structural growth to continue, supported by higher per-capita income, which translates to increased spending, and the growing participation of women in the workforce, leading to higher sales of women's wear.

Stock Picks

Trent: The brokerage has a ‘buy’ call on the Tata Group stock with a target price of ₹4,800. Axis expects strong revenue growth in the coming quarters, driven by Trent's focus on rapid store expansion and continued assortment renewal, which will lead to higher overall footfall. Additionally, the improvement in the earnings profile across all formats, the reduction in losses at Star Bazaar, and the improved traction at the Inditex JV are also positive signs for the company, it said.

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Westlife Foodworld: The brokerage has a ‘buy’ call on the stock with a target price of ₹980. It maintains a positive outlook on WFL on a longer-term basis. Axis' confidence in the company’s strong future prospects is supported by its strong execution track record of Revenue/EBITDA growth of 17%/51% over FY16-20. This was driven by new product launches and cost rationalisation programs (100-200bps cost reduction each year). It estimates the company to deliver healthy Revenue/EBITDA growth of 15%/15% CAGR over FY23-26E.

This growth is driven by expanding fast-growing categories like McDelivery, McCafe, McBreakfast, and Fried Chicken. The strategy includes leveraging delivery platforms to capitalise on the growing delivery channel and increasing store openings in smaller cities, raising the annual target to 40-45 stores from the previous 25-30. Additionally, transforming regular stores into tech-savvy Experience of the Future (EOTF) stores aims to enhance customer experience, explained Axis.

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Relaxo Footwear: The brokerage has a ‘buy’ call on the stock with a target price of ₹950. Axis noted that the footwear company's revenue decreased by approximately 2% YoY to ₹747 crore due to a 4% YoY decline in overall volumes, partially offset by a 3% YoY improvement in realisation. EBITDA, however, grew by 2% YoY to ₹120 crore, with margins increasing to 16.1%, up 68 bps YoY. This was driven by a significant improvement in gross margins, which rose 812 bps YoY to 60.3% due to lower raw material costs and better realisations.

Axis believes the worst is over for Relaxo, expecting demand to improve with good monsoons, especially in rural areas.

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.