Fresh covid surge poses risk to already slow recovery of retail cos

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Retail companies were among the worst hit by the covid-19 pandemic, especially apparel retailers. December quarter results showed that revenues of many companies were yet to return to a growth trajectory.

As such, the situation may take a while to improve as the recent surge in covid-19 cases is likely to impact the recovery in revenues even for the March quarter.

Varun Singh, an analyst at IDBI Capital Markets and Securities Ltd, said: “According to our channel checks, recovery in February has been subdued for apparel retailers. Of course, higher covid-19 cases in March deterred consumers from visiting malls and shopping. Footfalls have declined. As such, I don’t expect apparel retailers to report revenue growth in the March quarter.”

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Not in vogue

Some analysts have also raised concerns about escalating input costs. “At this time when apparel demand is still sluggish, the surge in raw material prices remains a big dampener. Cotton yarn and crude-based fabric prices have rallied nearly 30% in the last six months,” said a report by Motilal Oswal Financial Services Ltd on 30 March.

Needless to say, the impact on profit margins over the next few quarters remains to be seen. Even so, investors are likely to be more focused on demand revival as of now, as that would eventually determine the extent of improvement in revenues, and that’s paramount. Avenue Supermarts Ltd, which runs the D-Mart chain of retail stores, is better off compared to other retailers, thanks to a higher share of essential products in its portfolio. In fact, Avenue had seen revenue growth in the December quarter.

Nonetheless, the stock has declined by about 14% on the National Stock Exchange from its 52-week high on 5 March. But, valuations of the stock remain expensive at a price-to-earnings multiple of around 93 times for FY2022, according to Bloomberg data.

To be sure, shares of Trent Ltd, V-Mart Retail Ltd, Shoppers Stop Ltd and Aditya Birla Fashion and Retail Ltd (ABFRL) have also declined from the highs seen in 2021. Going ahead, news flow on vaccination will be key and optimism on this front may lend confidence to consumers.

“With increasing vaccination and normalization of economic activity, performance should improve meaningfully in the June quarter. Trent’s recovery is likely to be superior to V-Mart, which would see better recovery compared to ABFRL,” added Singh.

Trent’s superior execution and better balance sheet hold it in good stead vis-à-vis other retailers.

“We note that Trent has demonstrated consistent outperformance over peers in uncertain times. It has a better liquidity profile vs peers and is currently enjoying a net cash position,” pointed out a report by Antique Stock Broking Ltd on 31 March

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