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We expect the branded apparel and retail companies to post moderate revenue growth of 4.3% y-o-y in Q2FY2020 due to a slowdown in discretionary demand. Footwear companies are expected to post relatively resilient performance compared to others. Comparable margins are likely to remain under pressure owing to higher raw-material costs and increased advertising and promotional spends. Profit before tax (PBT) for our coverage universe is expected to decline by 3.4% y-o-y. Implementation of Ind-AS 116 would affect the bottom line of most companies under our coverage in Q2FY2020. However, a reduction in corporate tax rate would help most companies clock double-digit earnings. We expect the companies to pass on the benefit of lower tax to consumers. The upcoming festive/wedding season will pull up demand and improve operating performance of companies in our coverage in the coming quarters (likely in H2FY2020).

Outlook – Demand slowdown to sustain, festive season might provide some push to sales: Same store sales growth (SSSG) of most companies is likely to remain in mid-single digits owing to soft discretionary demand, which would affect revenue growth in Q2FY2020. However, demand is expected to improve in H2FY2020 as the festive and wedding seasons begin. Higher advertising and promotional costs might result in muted margins, but operating efficiencies and a better revenue mix would help mitigate margin pressures to some extent in the near to medium term. The implementation of Ind-AS 116 would affect bottom line of most branded apparel and retail companies in our coverage. We expect companies to increase the pace of innovation and open more stores as the cash flows increase post the corporate tax rate cut. The shift in demand from unbranded to branded products due to improving consumer aspirations, omni-channel strategies and retailers’ foray into tier-II and tier-III towns would help branded apparel and retail companies post decent operating performance in the medium to long term.

Valuation:  We remain selective and prefer stocks having a lean balance sheet with strong growth prospects. Thus, our preferred picks include Bata India (Bata), Indian Hotels Company (IHCL), Relaxo Footwears (Relaxo) and Inox Leisure (Inox). We expect Bata to benefit because of its recent strategy to rebrand itself as a branded footwear player from a conventional player. IHCL will benefit from a pick-up in the hotels industry and its focus on management contract hotels. A demand shift towards the organised sector and distribution expansion would continue to drive growth for Relaxo. We remain positive on Inox Leisure given its strong balance sheet (net-debt free) along with healthy cash-flow generation, increasing footfall monetisation efforts and a gradually narrowing gap on certain business matrices with the largest player in the industry.

Key risks: 1) Stiff competition in key categories would affect revenue growth; 2) A sustained slowdown in discretionary demand environment would affect earnings estimates for the coming quarters; and 3) regulatory changes in e-commerce policies would affect online trade channel of certain companies.

Leaders in Q2FY2020: Relaxo, Bata, Inox Leisure and Wonderla Holidays (WHL)

Laggards in Q2FY2020: Arvind and IHCL

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