M&A activity in the sector should continue, as better macros and share gains from unorganised players keep the growth trajectory strong.
August 2018 was a month of clearance, as apparel retailers continued their end of season sale (EOSS), while grocery retailers organised big sale events around Independence Day. As expected, reduction in sale days didn’t seem to materialise for retailers, as discounting remains high. M&A activity in the sector should continue, as better macros and share gains from unorganised players keep growth trajectory strong. ABFRL (Aditya Birla Fashion and Retail) and TRENT (retail hand of the Tata group) are our top picks.
Online retailers are conducting a big sale event every month to attract customers. In August, online retailers (Amazon, Flipkart, Myntra, Jabong) had ‘Freedom Sale’ around the Independence Day. Online grocery retailer, Big Basket, also organised its Independence Day sale.
For most apparel retailers, EOSS continued until mid-August. Though EOSS continued, retailers also focused on getting in fresh assortment during the fag end of sale season so that consumers get fresh merchandise. Among the retailers, Westside and Zara remained disciplined, with only about 30 days of discounting days during the season.
Ikea opened its first store in India in Hyderabad and saw strong initial consumer response. M&A activities and news around the same were high in August with Berkshire Hathaway buying a stake in Paytm and news of online retailers in final stages of buying a stake in Future Retail (though denied by the company).
The retail sector continues to see strong traction and we believe organised retailers are gaining market share from the unorganised ones. The pace of share gain has also picked up, led by higher discounting both in grocery and apparel. Given organised grocery has fewer players compared to apparel, growth in grocery will continue to be higher than apparel. Hence, execution holds key. Physical retailers are more agile now, with innovative ways to drive footfalls and reduce overall impact.
We continue to prefer apparel retailers to grocery. Though grocery and value apparel segments are best positioned, valuations are factoring in all positives. Within the strong execution bucket, TRENT is the only Buy, as we have a Hold on DMART and VMART, given unfavourable risk-reward. We have a Buy on ABFRL, which, in our view, is better placed to face competition with its strong brand portfolio and improving balance sheet. We have a Buy on FLFL and SHOP for steady performance and turnaround story, respectively. Amid rising complexity, we maintain a Hold on FRETAIL. Strong growth runway and M&A activity should keep valuations elevated for the sector.