Headwinds galore but these stocks can be good bets from retail sector

Amid growing inflation worries, demand for India's retail sector remains firm as consumption picked pace after two years of restrictions.

Market analysts believe that spending patterns across metro and mini-metros have remained healthy, whereas the lower income strata have been hit by challenging job market and inflationary pressures, resulting in a dent in their discretionary spends.

According to Phillip Capital, top retail companies across apparel, footwear, innerwear, and grocery, have seen their revenues increase by 21 per cent on a yearly basis.

In category mix, demand for formal wear gained momentum as mobility improved after a sharp recovery from the third wave, it added. "Also, occasion wear has been on track since the onset of Diwali in 2021, which has led to a positive shift in product mix for many retailers."

Currently, the sector is facing multiple headwinds including inflation, rising expenses of employees, supply chains, power and fuel and marketing cost. However, some of it has been mitigated by price hikes although margins, analysts say, are likely to take a hit.

Medium to long-term demand outlook is strong for the apparel retail industry, given the strong recovery in sales, improved consumer sentiments, higher store footfalls, increased aggression on store expansion and category expansion, said Systematix Institutional Equities.

Price hikes to mitigate raw material inflation has hurt consumer demand and sentiments. Further, a jolt to rural demand has been severe even as urban demand has remained relatively resilient, it observed.

Inventory build-up would improve operating cash flow, uniform growth across channels pushes for healthy store expansion and steady growth in online channels would aid the momentum going ahead, analysts suggested.

From the sector, Phillip Capital has picked Avenue Supermarts as its top bet from the largecap space, whereas Trent, Page, Bata and Aditya Birla Fashion & Retail are its midcap segment ideas. It has chosen Shoppers Stop in smallcap.

Systermatix has a buy rating on ABFRL and Trent with a target price of Rs 360 of Rs 1,410, respectively. It has given a 'hold' rating on VMart and Page Industries.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)