Covid-19 outbreak: Pain may not be limited to lockdown, say retailers

Change in consumer behaviour and higher fixed costs are major concerns, leading analysts to cut FY21 earnings estimate by 15-40 per cent

The Centre has permitted some industrial activity to begin from April 20, but the pain for retailers will last beyond the extended lockdown, with malls/stores closed till May 3.

An expected change in consumer behaviour is also likely to weigh on prospects for a few more quarters. Given these concerns, analysts have cut their FY21 estimates for retailers by 15-45 per cent.

Such concerns have started reflecting in share prices of retailers like Titan, Trent, Aditya Birla Fashion & Retail (ABFRL), V-Mart, Bata, and Page Industries, which have been underperforming on the Nifty India Consumption index, of late.

While stocks of retailers have slumped up to 32 per cent since last month, the consumption index has gained around 7 per cent during the same period. For Future Retail and Future Lifestyle Fashions, stocks have fallen more — by 50-60 per cent — because of concerns over pledged shares by promoters.

 

 

Given the pressure on the job market and household incomes, a change in consumer behaviour in favour of cash conservation, avoiding crowded places, cut in discretionary spending, and giving more preference to online channels, is expected.

In addition, this trend is expected to prevail for at least three quarters after the lockdown ends. This will keep a lid on retailers in the near term, say analysts. However, the impact on top line will depend on the nature of items a company deals in. For instance, Edelweiss Securities has lowered its FY21 revenue estimates by 4-7 per cent for food and grocery retailers like Avenue Supermarts, given their presence in essential items, and by a sharper 16-24 per cent for others.

Recent data from the US shows that retail sales in the country plunged 8.7 per cent in March — the worst since at least 1992.

Categories such as clothing, accessories, and home furnishing have seen up to 50.5 per cent fall in sales, while grocery sales have risen 26.7 per cent. “This indicates that the degree of impact that the pandemic has had, on customers’ buying preference. In fact, recovery of revenue loss in the near term would be challenging for discretionary players,” say analysts.

Pressure on top lines, coupled with the higher component of fixed costs, will hurt operating profitability and overall earnings of retailers.

According to Emkay Research, “Retailers have been most impacted by the loss in sales and a high fixed-cost structure.” The domestic brokerage has lowered its FY21 earnings estimates by 15-40 per cent for retailers under its coverage.

While some analysts believe large firms may negotiate lease rentals, the extent of negotiation, given the present scenario, needs to be watched. Muted operating performance will hit entities like ABFRL and Future Retail most, because of their high leverage. As a result, analysts at Edelweiss Securities advise investors to avoid these stocks.

There will also be some negative impact of new accounting norms (Ind AS) on inventory value, on account of the likely lower realisable value and lease rental, says Motilal Oswal Securities.

Therefore, how each firm strategises in terms of distribution (as online constitutes just 10-11 per cent of sales) and pricing to recover from the lockdown impact, holds key for investors.