Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities and Mr. Varun Lohchab, Institutional Research Analyst, HDFC Securities

Discretionary Categories Impacted by Wave 2: Our Discretionary Universe is expected to grow 42% / ~ 5x year-on-year revenue / EBITDA (on a weak basis) in 1QFY22. Underlying demand continues to be impacted by the second wave of the pandemic (CAGR over two years / EBITDA of -10 / -29%). F&G, jewelry, paints and clothing are expected to reach 5%, -23%, -5% and -39% (2 year CAGR). Retail banknote sizes, although normalizing, remain high from pre-COVID levels; attendance is still far from a full recovery.

Margins are expected to remain suboptimal: In Q1, CEOs in most discretionary categories are expected to remain under pressure from typical execution rates, given (1) commodity inflation, (2) from the lower income composition and (3) from the sale of inventory. offs (in the case of clothing retailers). EBITDAM should improve year-on-year, given favorable operating leverage, but should be sup-optimal compared to steady-state margins (excluding paints) in 1Q.

Store / Dealer Additions Pause: Store / Dealer Additions for Retail / Paint businesses are likely to be low given that construction activity took a break in Wave 2.

Channel checks: Our value chain checks suggest that (1) in F&G, international e-merchants and Reliance Retail have improved their assortment availability and pricing mechanisms. Therefore, competitive intensity would be a controllable key for powerful offline incumbents; (2) The amount of lease concessions / waivers granted by owners in FY21 to clothing retailers has decreased significantly. This remains a huge risk for margins in FY22, if footfall doesn’t oblige. In this context, a third wave could be particularly punitive for clothing retailers, especially those with weaker balance sheets; (3) For paint companies, rural demand continues to be strong, while Tier 1 metropolises / towns continue to take a hit (although the hit is less intense than in the base quarter).

The value-price dislocation is widening: While our expectations for revenue growth / EBITDA in FY19-24 and steady-state return profiles have not changed significantly, the dislocation between The value and price within the discretionary pack has never been wider, following the recent surge in the performance of the respective stocks (the space is currently trading at 50-80x P / E as of June 23). Downgrades: Asian Paints (from REDUCE to SELL) and V-MART (from REDUCE to SELL). Note: The TP changes largely mimic (1) the deferral of DCF to June 23 and (2) the marginal increase in FY 23 estimates to account for lower-than-expected cost structures.

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