Karan Taurani, Executive V-P, Elara Capital, suggests a tactical approach to Jubilant when valuations are reasonable, favoring Sapphire Foods and Devyani. QSR sector's growth is currently unexciting due to stalled SSG convergence. Store addition guidance is crucial, especially for Westlife and Jubilant. Platform companies like Eternal and Swiggy are preferred, followed by QSRs and Trent, contingent on valuations.
What is your first take on DMart's numbers? It has been largely mixed, slightly disappointing. Some metrics have done well, but the bottom line has not done well at all. What is your take on DMart's quarter one?
Karan Taurani: On the revenue growth side, the DMart numbers are as per the management update of about 16 odd percent. There is a clear trend in terms of convergence in same-store sales growth (SSG) or the like-for-like (LFL) growth for a company like DMart and that is clearly happening because of the pressure of quick commerce in the metro markets and also the FMCG vertical.
So, there are concerns as far as growth is concerned. This may continue over the near term as well because quick commerce is expanding aggressively. New players are coming into the quick commerce business and are adding a lot of new dark stores. And if at all, quick commerce scales up beyond the metro markets, we could see further challenges for a company like DMart as far as SSG and LFL is concerned. The good part is that store addition guidance has been on track. They are on track to add about 50 to 60 new stores this year. So, store addition remains healthy.
The second good thing is that DMart is not seeing too much competition internally within the other modern trade players like Reliance Retail and Star Bazaar. Most of these players are either stable in terms of stores or are reducing the number of stores. From that perspective, DMart continues to have an edge.
As far as profitability is concerned, there is pressure primarily because of discounting in the quick commerce business and this may continue in the near to medium term. That’s why DMart is one company which should be played primarily on the basis of valuations because one will not see a big fillip or delta in terms of earnings upgrade, at least in the near term, unless this entire threat of quick commerce comes down beyond a point.
So, one should play this at valuations wherein if the PE multiples move below 60 times on a forward basis, one can buy into the stock and at about 70 times PE, go underweight. It is a tactical play in the near term, unless we see some clarity in terms of where quick commerce is going in terms of expansion in non-metro markets and how much scope is there for them to go in the metro markets as well.
With respect to the store additions, DMart has been in focus. But how do you see the LFL growth shaping up because in this particular quarter, it has softened further. Going ahead, are you anticipating any recovery in this number?
From an LFL growth standpoint, we do not see any recovery as such. At best, the LFL growth can sustain at these levels or may even see a downfall. What is happening in the metro markets is that a lot of top up purchases are now being done by quick commerce. So, if you look at the SSG or the LFL, in the first half of the month, it is reasonably strong. But in the second half of the month, because the consumers are doing a lot of top-up purchasing from quick commerce, we are seeing a lower SSG as compared to the first half of the month. This trend will continue as a phenomenon.
Secondly, if we look at quick commerce as well, about six months back, it was very clear that the non-metro markets are not meant for quick commerce. But as per our checks on ground, the quick commerce business is doing reasonably well in terms of non-metro markets with a lower AOV. Obviously, they are making losses in non-metro markets being a new proposition altogether. But if at all quick commerce scales up in the non-metro markets beyond a respectable scale, we could see further LFL pressure on DMart.
How are you seeing other retailers like Nykaa, Jubilant, United Spirits? How are they positioned amid the current demand scenario and cost pressures? Are there any clear outperformers based on the FMCG and retail and QSR updates we have seen so far?
Karan Taurani: If you look at the consumer discretionary pack as a whole, there are not enough plays on the basis of growth and valuation. One should play with platform internet companies selectively which have been a safety haven and have high visibility for growth. You can play with the likes of Eternal and the Swiggy, which have got better visibility of growth and the profitability metrics will only improve from here on.
Nykaa also has done reasonably well. Their growth continues to be very strong, 25-30% in terms of the BPC GOV, but valuations on the core BPC side are at a premium. So, one may not see incremental upgrades or incremental re-rating of valuation multiple for Nykaa. The drivers therein are obviously lower losses or a break-even in the fashion business, increase in margins for the BPC business, these could be two drivers for the further re-rating and further upgrade as far as Nykaa is concerned.
Otherwise, things will remain to be where they are for Nykaa in a narrow band. If you look at the QSR piece, too many concerns are there because clearly most of the companies are still reporting negative SSG, except for Jubilant, which has seen to turn around internally. But valuations there appear to be premium.
Within the QSR space, one can play Jubilant tactically when their valuations reach a reasonable level. Among others, we like Sapphire Foods followed by Devyani in pecking order. Westlife also has a reduced rating. But QSR is not offering anything exciting because SSG convergence has not stopped. We could see basically SSG growing in terms of the next couple of quarters because of the festive season going ahead and that momentum has to sustain.
A very important thing to watch out for in QSR is store addition guidance. Most of the companies are adding stores. If you look at the fried chicken side, there is low penetration in a market like India. So, they are adding stores aggressively. But what happens to the likes of Westlife and Jubilant FoodWorks in terms of store addition for the next two to three years? That is a key monitorable.
Third, of course, is the margin. Most of these companies have given up on margins anyway in the range of 300 to 500 basis points in terms of EBITDA margin over the last two to three years because of rising pressure in terms of dining sales and because of increased competitive intensity. The first thing to watch out would be the margins to stabilise, then growth should come back, and then potentially we see margin improvement for the mid- and long-term perspective. But there is no visibility in terms of how that will happen and how much time that could take, which is why Jubilant and Sapphire Foods are the only names that we could play, wherein Sapphire we would play for valuations because valuations are extremely low as compared to peers and Jubilant we would play for growth at reasonable valuations.
As far as alcobev is concerned, we like companies like Radico over United Spirits and United Breweries because Radico, both from a growth and a margin perspective, is going to see very strong tailwinds from here on. Radico's growth is about 15% to 20% in terms of overall portfolio revenue growth. If you look at the margin expansion story, they could see earnings CAGR of 25-30% over the next two to three years.
So, because of the high visibility, Radico valuations are expensive, but we would like to bet on these kinds of companies where the visibility of growth is very high. As far as United Breweries (UB) is concerned, they have their own set of issues. UB volume growth has come to a reasonable level, but the problem is with margins. Margins continue to be extremely low as compared to what they were. They are not able to see a consistent improvement in margin despite even something like a Telangana price hike, which happened about six months back.
As far as United Spirits is concerned, there are concerns over growth. Margins have plateaued out at 17-18% for the core alcobev business and valuations are premium. And the recent impact of Maharashtra is going to be very big, given the high exposure in Maharashtra market and Maharashtra being a highly profitable state in terms of overall profitability.
So, net-net, we like platform companies like Eternal and Swiggy, followed by QSR companies like Jubilant and Sapphire, and then one could place something like Trent at reasonable valuations because Trent, we do not foresee growth rates coming below 25% in the near to medium term.
What about the FMCG and the staple pack because there the excitement seems to be on the back of the Q1 updates? Markets are finding them to be good. But the other worrying point has been the pricing scenario because of competition and low demand. The companies do not have pricing power. Is even that aspect getting a bit of a breather?
Karan Taurani: FMCG has a long way to go in terms of recovery, whether you call it earnings upgrade or valuation re-rating, primarily because of two-three reasons. One is that volume growth remains under pressure. If we look at the overall growth, we do not see any big premiumisation trend for the large FMCG companies and they are underperforming the market. Obviously, they are at a respectable scale.
But if we look at the flooding of B2C brands, many new brands are coming to the market. So FMCG companies could be under pressure. FMCG companies could also see pressure in terms of overall profitability, because quick commerce has just taken off. For any FMCG company, quick commerce would contribute nothing more than 1% to 2% of sales.
But in the metro markets, this number is as high as 15% to 20% in certain categories and certain cases. The way quick commerce is disrupting the overall business space, we could see margin pressure as well for FMCG companies. Given the kind of valuations, most of the FMCG companies do not offer ample room for re-rating of valuation multiple as well given the kind of muted growth prospects that they have both near to medium term perspective. So, one would rather play discretionary over FMCG, given the kind of growth rates and given the kind of earnings upgrade possibility in certain selective names.
Reports suggest that the Maharashtra government could be looking to lift the 50-year-old restriction on issuing new liquor shop licenses. What does this mean for the industry overall? Is there any benefit to any company in the listed universe?
Karan Taurani: The Maharashtra market contributes about 12-14% volume for the larger players. Revenue contribution is anywhere in the range of 15% and 20%. We remain positive. The increase in the number of outlets by 20% over the next 15 years will pave the way for better distribution and better growth in the market as a whole.
But the Maharashtra excise announcement, which came last month is going to be a structural negative in terms of both volume and revenue growth for a market like Maharashtra. Increase in the number of outlets will offset some bit of negative impact of this Maharashtra excise hike which has come in, but it is not going to be like a big win-win or a fillip, because the number of outlets is growing by 20% over the next 15 years, which is not a big number as such.
Maharashtra is the only state which has not seen an increased number of outlets. Other states have seen a 2-3% increase in the number of outlets over the last five to seven years. So, it is a small positive, and not a big game-changing move for the alcobev players in Maharashtra.
What is your first take on DMart's numbers? It has been largely mixed, slightly disappointing. Some metrics have done well, but the bottom line has not done well at all. What is your take on DMart's quarter one?
Karan Taurani: On the revenue growth side, the DMart numbers are as per the management update of about 16 odd percent. There is a clear trend in terms of convergence in same-store sales growth (SSG) or the like-for-like (LFL) growth for a company like DMart and that is clearly happening because of the pressure of quick commerce in the metro markets and also the FMCG vertical.
So, there are concerns as far as growth is concerned. This may continue over the near term as well because quick commerce is expanding aggressively. New players are coming into the quick commerce business and are adding a lot of new dark stores. And if at all, quick commerce scales up beyond the metro markets, we could see further challenges for a company like DMart as far as SSG and LFL is concerned. The good part is that store addition guidance has been on track. They are on track to add about 50 to 60 new stores this year. So, store addition remains healthy.
The second good thing is that DMart is not seeing too much competition internally within the other modern trade players like Reliance Retail and Star Bazaar. Most of these players are either stable in terms of stores or are reducing the number of stores. From that perspective, DMart continues to have an edge.
As far as profitability is concerned, there is pressure primarily because of discounting in the quick commerce business and this may continue in the near to medium term. That’s why DMart is one company which should be played primarily on the basis of valuations because one will not see a big fillip or delta in terms of earnings upgrade, at least in the near term, unless this entire threat of quick commerce comes down beyond a point.
So, one should play this at valuations wherein if the PE multiples move below 60 times on a forward basis, one can buy into the stock and at about 70 times PE, go underweight. It is a tactical play in the near term, unless we see some clarity in terms of where quick commerce is going in terms of expansion in non-metro markets and how much scope is there for them to go in the metro markets as well.
With respect to the store additions, DMart has been in focus. But how do you see the LFL growth shaping up because in this particular quarter, it has softened further. Going ahead, are you anticipating any recovery in this number?
From an LFL growth standpoint, we do not see any recovery as such. At best, the LFL growth can sustain at these levels or may even see a downfall. What is happening in the metro markets is that a lot of top up purchases are now being done by quick commerce. So, if you look at the SSG or the LFL, in the first half of the month, it is reasonably strong. But in the second half of the month, because the consumers are doing a lot of top-up purchasing from quick commerce, we are seeing a lower SSG as compared to the first half of the month. This trend will continue as a phenomenon.
Secondly, if we look at quick commerce as well, about six months back, it was very clear that the non-metro markets are not meant for quick commerce. But as per our checks on ground, the quick commerce business is doing reasonably well in terms of non-metro markets with a lower AOV. Obviously, they are making losses in non-metro markets being a new proposition altogether. But if at all quick commerce scales up in the non-metro markets beyond a respectable scale, we could see further LFL pressure on DMart.
How are you seeing other retailers like Nykaa, Jubilant, United Spirits? How are they positioned amid the current demand scenario and cost pressures? Are there any clear outperformers based on the FMCG and retail and QSR updates we have seen so far?
Karan Taurani: If you look at the consumer discretionary pack as a whole, there are not enough plays on the basis of growth and valuation. One should play with platform internet companies selectively which have been a safety haven and have high visibility for growth. You can play with the likes of Eternal and the Swiggy, which have got better visibility of growth and the profitability metrics will only improve from here on.
Nykaa also has done reasonably well. Their growth continues to be very strong, 25-30% in terms of the BPC GOV, but valuations on the core BPC side are at a premium. So, one may not see incremental upgrades or incremental re-rating of valuation multiple for Nykaa. The drivers therein are obviously lower losses or a break-even in the fashion business, increase in margins for the BPC business, these could be two drivers for the further re-rating and further upgrade as far as Nykaa is concerned.
Otherwise, things will remain to be where they are for Nykaa in a narrow band. If you look at the QSR piece, too many concerns are there because clearly most of the companies are still reporting negative SSG, except for Jubilant, which has seen to turn around internally. But valuations there appear to be premium.
Within the QSR space, one can play Jubilant tactically when their valuations reach a reasonable level. Among others, we like Sapphire Foods followed by Devyani in pecking order. Westlife also has a reduced rating. But QSR is not offering anything exciting because SSG convergence has not stopped. We could see basically SSG growing in terms of the next couple of quarters because of the festive season going ahead and that momentum has to sustain.
A very important thing to watch out for in QSR is store addition guidance. Most of the companies are adding stores. If you look at the fried chicken side, there is low penetration in a market like India. So, they are adding stores aggressively. But what happens to the likes of Westlife and Jubilant FoodWorks in terms of store addition for the next two to three years? That is a key monitorable.
Third, of course, is the margin. Most of these companies have given up on margins anyway in the range of 300 to 500 basis points in terms of EBITDA margin over the last two to three years because of rising pressure in terms of dining sales and because of increased competitive intensity. The first thing to watch out would be the margins to stabilise, then growth should come back, and then potentially we see margin improvement for the mid- and long-term perspective. But there is no visibility in terms of how that will happen and how much time that could take, which is why Jubilant and Sapphire Foods are the only names that we could play, wherein Sapphire we would play for valuations because valuations are extremely low as compared to peers and Jubilant we would play for growth at reasonable valuations.
As far as alcobev is concerned, we like companies like Radico over United Spirits and United Breweries because Radico, both from a growth and a margin perspective, is going to see very strong tailwinds from here on. Radico's growth is about 15% to 20% in terms of overall portfolio revenue growth. If you look at the margin expansion story, they could see earnings CAGR of 25-30% over the next two to three years.
So, because of the high visibility, Radico valuations are expensive, but we would like to bet on these kinds of companies where the visibility of growth is very high. As far as United Breweries (UB) is concerned, they have their own set of issues. UB volume growth has come to a reasonable level, but the problem is with margins. Margins continue to be extremely low as compared to what they were. They are not able to see a consistent improvement in margin despite even something like a Telangana price hike, which happened about six months back.
As far as United Spirits is concerned, there are concerns over growth. Margins have plateaued out at 17-18% for the core alcobev business and valuations are premium. And the recent impact of Maharashtra is going to be very big, given the high exposure in Maharashtra market and Maharashtra being a highly profitable state in terms of overall profitability.
So, net-net, we like platform companies like Eternal and Swiggy, followed by QSR companies like Jubilant and Sapphire, and then one could place something like Trent at reasonable valuations because Trent, we do not foresee growth rates coming below 25% in the near to medium term.
What about the FMCG and the staple pack because there the excitement seems to be on the back of the Q1 updates? Markets are finding them to be good. But the other worrying point has been the pricing scenario because of competition and low demand. The companies do not have pricing power. Is even that aspect getting a bit of a breather?
Karan Taurani: FMCG has a long way to go in terms of recovery, whether you call it earnings upgrade or valuation re-rating, primarily because of two-three reasons. One is that volume growth remains under pressure. If we look at the overall growth, we do not see any big premiumisation trend for the large FMCG companies and they are underperforming the market. Obviously, they are at a respectable scale.
But if we look at the flooding of B2C brands, many new brands are coming to the market. So FMCG companies could be under pressure. FMCG companies could also see pressure in terms of overall profitability, because quick commerce has just taken off. For any FMCG company, quick commerce would contribute nothing more than 1% to 2% of sales.
But in the metro markets, this number is as high as 15% to 20% in certain categories and certain cases. The way quick commerce is disrupting the overall business space, we could see margin pressure as well for FMCG companies. Given the kind of valuations, most of the FMCG companies do not offer ample room for re-rating of valuation multiple as well given the kind of muted growth prospects that they have both near to medium term perspective. So, one would rather play discretionary over FMCG, given the kind of growth rates and given the kind of earnings upgrade possibility in certain selective names.
Reports suggest that the Maharashtra government could be looking to lift the 50-year-old restriction on issuing new liquor shop licenses. What does this mean for the industry overall? Is there any benefit to any company in the listed universe?
Karan Taurani: The Maharashtra market contributes about 12-14% volume for the larger players. Revenue contribution is anywhere in the range of 15% and 20%. We remain positive. The increase in the number of outlets by 20% over the next 15 years will pave the way for better distribution and better growth in the market as a whole.
But the Maharashtra excise announcement, which came last month is going to be a structural negative in terms of both volume and revenue growth for a market like Maharashtra. Increase in the number of outlets will offset some bit of negative impact of this Maharashtra excise hike which has come in, but it is not going to be like a big win-win or a fillip, because the number of outlets is growing by 20% over the next 15 years, which is not a big number as such.
Maharashtra is the only state which has not seen an increased number of outlets. Other states have seen a 2-3% increase in the number of outlets over the last five to seven years. So, it is a small positive, and not a big game-changing move for the alcobev players in Maharashtra.
