Distribution players see a constant rebound | Motilal Oswal Financial Services

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Distribution players see a constant rebound | Motilal Oswal Financial Services

Posted on December 30, 2021

We have performed channel checks for a multitude of listed and unlisted clothing retailers. Here are the main points to remember:

Current sales trends (positive LTL)

Our recent channel checks and interviews with multiple retailers (listed and unlisted) indicate that the performance of 3QFY22 has seen a steady rebound from COVID-19 – in particular, with healthy LTL growth in the high numbers through to mid-adolescence during the period October-November. festive period. However, December 21 was somewhat slow, especially after the first 10 days, possibly due to a) lack of a good time shopping for weddings over the next 30 days, b) fatigue from the consumption after the period of pent-up demand, and c) consumers and local authorities are made aware of the increase in COVID-19 cases caused by Omicron.

Urban, Clean Retail Store Owners / EBO Focused Actors See Better Traction

Urban markets have performed better than rural markets – Tier 2/3 markets barely reach pre-COVID LTL performance levels. Our channel checks further suggest that exclusive brand outlets (EBOs) in the retail channel have experienced a much better recovery than multi-brand outlets (MBOs) in the distribution channel. This could be due to a) poor performance in Tier 2 and 3 cities, which remain the key market for MBOs, b) low liquidity of small distribution partners, and c) increased penetration of online players in level 2/3 towns. Our channel checks suggest that Westside, ABFRL (Lifestyle Brands and Pantaloons) and even Shoppers Stop are expected to experience positive same-store sales (SSSG) growth ranging from zero to high. Conversely, level 2/3 focused actors such as VMART may see a negative single digit SSSG.

Rising prices driven by rising RM prices and impact of GST could weaken demand or contract margins

Over the past two quarters, most retailers have increased their prices by 7-8%. Increasing the GST rate from 5% to 12% for products under INR 1000 (above INR 1000 was already at 12% GST) would be passed on to the consumer, which could result in an additional 8-10% increase from January 22. Existing inventory prices of 40-80% have been revised to reflect the new GST rate, while there may be some impact on the sales margin of the remaining inventory. The persistent weakness in demand, coupled with the increase in COVID cases, could be further accentuated by a cumulative price increase of around 15% over 8-10 months; if a price increase is not caught, some pressure on margins is likely.

Significant online shift; no slackening in the aftermath of the COVID waves

Contrary to the perception that e-commerce would ease as stores reopen after COVID restrictions were eased, the online channel continued to maintain the business trajectory – as suggested by most. listed and unlisted retailers. We understand that small brands with a smaller business footprint have taken a more aggressive route to generating business online – almost a third of their revenue now comes from the online channel, including captive and marketplace websites. Big brands / retailers with a deeper footprint have revenue in the high double-digit low single digits now coming from the online segment, which has remained strong even after the markets reopened.

Strong focus on data analysis

Almost three out of four retailers we spoke with have been actively working on data analytics to improve customer preferences and demand trends, which could help a) improve inventory management, b) improved levels of service, c) keep pace with changing market trends, and d) explore new areas of growth. Machine learning is very successful. One of the main focus areas is having a single view of the customer on CRMs for online / offline visits (multi-channel view), which could allow transparent tracking of customer behavior.


Led by a long track of growth, the valuations of distribution companies are determined by a visibility of accelerated growth, with a disciplined approach (lean balance sheets). We prefer ABFRL / V-Mart (Buy) given the valuation / growth equations that are comfortable with those of its peers. Trent certainly has the best visibility for growth and the best track record, but appears to be heavily factored into the valuation (Neutral). On the other hand, Shoppers Stop’s recent aggressive growth target presents an interesting opportunity (Neutral).

Stephen V. Lee