Muted June quarter likely for listed retail companies

However, analysts say the long-term trend for traditional retail in the organised sector remains in place, indicating that companies could grow at 12-plus per cent annually

The June quarter could see revenues of listed retailers under pressure, with higher discounting by online players and corresponding offers from traditional retailers. Online offers and promotional activities were especially high in May.

Analysts at financial services entity Jefferies say that with two large global rivals (Amazon and, after the Flipkart acquisition, Walmart) controlling 70 per cent of online retail sales, the likelihood of a rise in online competition remains as they bid to drive market share. In addition to the online entities, Future Group ran aggressive schemes, with higher advertising and promotions. Big Bazaar and Reliance Smart are along the lines of DMart, offering everyday low pricing-type schemes.

If the discounting trends sustain and/or intensify, it could be detrimental to the growth trends the sector has been seeing. Not surprisingly, most retail stocks, after having outperformed the benchmark Sensex on the BSE exchange in the past year, are now tracking it.

While there have been aggressive promotions, there has been no indication of a structural change, say experts. Ajay Srinivasan, research director at ratings agency CRISIL, believes that in select segments such as grocery, competition might intensify from online companies. He does not expect significant change in market dynamics. Sharekhan’s Kaustubh Pawaskar also believes that aggressive discounting by online entities might may not have a large impact as feared, given the low penetration of online shopping in India.

Even so, if the worldwide trend of traditional retailers feeling the heat starts to play out, especially given two deep-pocketed online competitors, revenues would come under pressure. This needs to be watched.

The near-term worry in the sector, however, is that after a fall in same-store sales (SSS) growth in the March quarter, the June quarter's performance is expected to be muted. SSS reflects the performance of stores in operations for at least a year. Analysts such as Sharekhan’s Pawaskar believe SSS growth might be lower in the June quarter as compared to the corresponding quarter last year, due to a high base effect.

In the March quarter, while Pantaloons (Aditya Birla Fashion or ABFRL) recorded a fall of six per cent over the year-ago period on a low base, Shoppers Stop and Easy Day (Future Retail) posted a fall of three to four per cent each. Stiff competition from Reliance Trends, Future Group (Pantaloons), renovation work (Shoppers Stop), lower sales promotion days (for all players) and GST (goods and services tax) related pricing led to lower growth. The lesser number of discount days during the March quarter was due to an early start of the end-season sale in December, about 10 days prior to the usual timeline. Cannibalisation of stores led to Avenue Supermarts posting a lower than expected SSS growth for FY18 to 16 per cent, as against 21 per cent in FY17.

SSS growth is, however, expected to firm up from the September quarter (Q2), led by improving discretionary spending; also, consumer demand is expected to remain strong with a better monsoons. This is positive for retailers.

Analysts say the near term could see some pressures but the longer term trends for traditional retails in the organised sector remains in place. Indicating that companies could grow at 12-plus per cent annually, as seen over the past three years. In fact, demand trends are expected to improve for the larger ones in this space. In addition to the improving economic outlook, which will drive consumer sentiment and discretionary spending, Srinivasan of CRISIL says initiatives such as GST are likely to drive market share gains for organised players. He believes expansion (increase of store count) and increasing preference by consumers to make purchases from large organised outlets will drive demand for traditional retailers.

Given the backdrop, most analysts are bullish on the top retail stocks. Barring Avenue Supermarts and V-Mart, their target prices for Trent, Shoppers, ABFRL and Future Retail suggest a rise in excess of 15 per cent over a one-year period.