Trent’s still a buy for Nuvama; government push needed to boost urban demand: Abneesh Roy

Abneesh Roy, ED, Nuvama, says some benefit to boost the lower end of consumption is expected in the Union Budget. Rural consumption is doing quite well after all the stimulus programmes. So, on urban demand, the government needs to do something.

Some brokerages have downgraded retail plays and even Trent to sell and there is mixed opinion out there. What would be the future of retail plays like Trent at Nuvama, which have already seen a fabulous run up? The valuations are still expensive after the current correction as well?
Abneesh Roy: We are positive on Trent. We continue to have a buy and one of our top picks in the apparel space. In the near and medium term, Trent will remain in the top tier in the peer set in terms of growth. We do see a huge headroom for expansion in Zudio, in Westside, even in terms of the emerging categories like BPC, innerwear, footwear, that was around 20% of the business, and that is also growing.

Even StarBazaar is doing quite well. So, we remain positive. We have a buy and it is among our top picks. In the near term, of course, marriage season should definitely help. We did see, for example, Shoppers Stop also report a decent set of numbers. So, we are not negative. We are, in fact, quite positive on that name.

What is your take on staples? It is expected that in the coming Budget, a lot of hopes would be built in and that might give some boost or some leg up when it comes to the consumption basket. What are your thoughts on that because the Q3 updates have been a mixed bag. While the market is giving a thumbs up to some of the updates from Marico, Dabur was not looking that great. What is your view on staples for this particular calendar year?
Abneesh Roy: Yes, there is an expectation that the Union Budget on February 1st will consider steps to fight the urban slowdown which is impacting the lower end of consumption. Some benefits in terms of threshold taxation are expected.

At the lower end, clearly, we see a problem and we have been highlighting that two more quarters of pain in urban consumption will be there, that is why if you see the updates which have come in Q3, Marico is seeing good growth because Marico's foods and personal care business caters more to the mid and premium end of urban consumption and even in the rural, they are seeing good growth.

Dabur is more of a mass consumption product and we have pointed out that the Campa-Cola impact is there on Dabur's fruit juice business, on the beverage business of Tata Consumer, and of course on Varun Beverages. So, company-specific, some competitive issue is there on Dabur, but some benefit to boost the lower end of consumption is expected in the union budget. Rural consumption is doing quite well after all the stimulus programmes. So, on urban demand, the government needs to do something.

But what about QSR? Are things looking on the mend after Jubilant's provisional data?
Abneesh Roy: No, not necessarily. We cannot extend that to the entire sector. Of course, in the QSR sector, the last two years have been quite challenging for most companies. So, the base has become favourable, but in terms of urban consumption at the lower end, and a lot of the QSR are, of course, mass consumption now, there is still a challenge because in the urban consumption, rents being quite high, the salary-wage hike has been below the desired level, and inflation is still high, though some bit of the food inflation has cooled off. That is a positive, but not enough.

So, Jubilant Foods growth is more of an outlier and we would expect that most of the other QSR will be lower in terms of growth and we would expect them to be more like low single-digit SSG growth or maybe flattish. So, Domino's is an outlier. They are gaining market share. They are aggressive on the delivery format. They have become more competitive. Clearly, the market leader is going for market share expansion and the other players will be seeing a lower number.

What are the internals that you look at for Reliance Retail today?
Abneesh Roy: In terms of the grocery, we have seen DMart's margins being under pressure. DMart did report good top-line growth, which initially the Street liked and the store expansion was good. Similarly for Reliance in terms of grocery business, one has to look at the margin pressure, because clearly Swiggy, Zomato, Zepto are becoming quite aggressive in terms of the expansion, and in terms of the share also they are gaining from the FMCG companies in terms of the distribution. So, net-net physical retailers will see that challenge.

In the jewellery business, clearly I see good numbers. Titan’s update has come as also for other jewellers. That should do quite well even for Reliance because of the marriage season and strong gold prices. These are the two main metrics and going ahead also, the marriage season for the next two quarters remains quite strong. So, the numbers should be better for most of the retailers because of all these reasons in the near term.

I do not know how closely you are looking at the entire Q-Comm and e-comm space. It may be in a duopoly within the listed universe right now, but it is pretty neck-and-neck when it comes to competition within the entire segment and especially in the Q-Comm space. Having said that, the valuation comfort, I guess, is more in Swiggy right now versus Zomato.
Abneesh Roy: You are right. I will not be able to comment on that. I do not cover them. My comment was more from the FMCG perspective and competition to the physical retailers. But when I see the FMCG also, they are quite positive on Q-commerce.

Q-commerce is almost 40% of the overall e-commerce space for FMCG companies and it is margin-accurate because in quick commerce, there is a lot of impulse purchase. A lot of premium products, larger packs are also now being sold, and clearly, the intermediaries are much fewer. So, it is a channel which is going to gain share from the kirana stores and possibly even modern trade. So, we are quite positive.

From the FMCG perspective, we think the D2C startup companies in the FMCG space will face tougher times because the larger legacy companies like Marico, Hindustan Unilever, Godrej, have now learnt the D2C way of working and they are also going to be quite aggressive on acquisition. So, definitely good days ahead for quick commerce, e-commerce, and for FMCG, those are very high priority channels and so we will be positive.

In the discretionary space, we like liquor companies a lot. So, in Q3 results which start next week for FMCG, you will see United Spirits reporting very strong numbers. The stock had sold off because of the change in MD, but we are not at all concerned because the new MD also comes with the Pepsi kind of a strong experience and background and definitely the template is there. Hina Nagarajan will be ensuring that seamless transition happens. So, United Spirits is something here which we are quite positive in the discretionary space.