Apparel retailers face higher cost risks in ’22
Premium- When Q3FY22 results are announced, management commentaries would shine light on the situation
Investors in apparel retailers are sitting on robust gains in 2021. Shares of Trent Ltd, Aditya Birla Fashion and Retail Ltd, V-Mart Retail Ltd and Shoppers Stop Ltd increased in the range of 45-65% last year. That compares with the Nifty 500 index’s 30% gain during the same time frame.
While circumstances were challenging, hopes of a strong demand recovery once normalcy sets in kept sentiments high for retail stocks. Companies saw a steady recovery in revenues by the September quarter.
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While that bodes well, 2022 won’t be an easy year. Rising cases of the Omicron coronavirus variant are an immediate threat to the pace of recovery. Akhil Parekh, an analyst at Centrum Broking Ltd, said, “Prima facie, there are three concerns as 2022 begins, the first being sharp inflationary pressures." Here, investors will have to watch how companies battle higher input costs and the impact on demand of the price hikes taken. Parekh added, “Second concern is the potential restrictions/lockdowns due to Omicron. Third, the anticipated GST rate hikes on textiles." For now, the GST hike on textiles has been deferred.
Some analysts point out that recent channel checks and conversations with companies indicated that demand in December was somewhat slower vis-à-vis October-November. As such, when the fiscal third quarter results are announced, management commentaries would throw more light on the situation. Notwithstanding Omicron concerns, the overall demand outlook appears reasonably encouraging.
“Apparel retail companies may see a gradual demand recovery entering CY22 amid rising concerns around Omicron. Most companies have strengthened their balance sheets in CY20-21 via equity raise, managed cost structure and working capital well, and are in a better position to manage current uncertainties," ICICI Securities Ltd’s analysts said in a note to clients last month.
Store additions are expected to pick up pace this year, and that’s what investors are likely to monitor. Further, whether the momentum in the online segment sustains remains to be seen post the easing of covid-led restrictions.
To be sure, the sharp rally in retail stocks in 2021 suggests investors are factoring in a strong rebound in demand. But, this could limit significant upsides in the near term. “Strong brands with good balance sheets would continue to benefit from the unorganized to organized shift," said Parekh. Specifically, for V-Mart, the anticipated turnaround of Unlimited stores is a factor to watch. Trent’s growth plans and strong balance sheet holds it in good stead, though the stock’s valuations are pricey. Overall, the biggest risk retailers may face in 2022 is lower-than- expected demand recovery.
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