Varun Beverages And Trent Are Investor Favourites In Challenging Consumer Market
Brands like Varun Beverages, Godrej Consumer, and Hindustan Unilever stood out for their ability to adapt to evolving demand dynamics with their internal initiatives.
Varun Beverages Ltd. is the top choice for investors in a consumer segment facing near-term challenges as urban demand weakness outweighs rural recovery. Citi Research found that it was least impacted by the demand weakness in India, though there were concerns about a potential GST hike.
The brokerage was also positive on Trent Ltd. with a 'buy' rating and a target price of Rs 9,350 per share, despite investor concern regarding its aggressive store additions. Citi initiated coverage on the Zudio operator in September and has since upped the target price twice. The current target price implies an upside of 36.15%, compared to Tuesday's close of Rs 6,878.05.
Despite their cautious outlook on the consumer space, investors continue to see long-term opportunities in its growth, found Citi Research. The note also found investors leaning toward companies with lower earning downgrade risks.
A pressing concern among investors was the urban consumption slowdown, which was expected to negate any benefits from rural market recovery. Their discussions were also centered around competitive pressure in segments such as paints, grocery retail, and jewellery, Citi found. Investors were adopting a selective approach, focusing on stocks with the least risk of earning downgrades in the coming quarters.
Key Investor Queries On Discretionary And Retail
Within consumer discretionary and retail, Citi found that investors remained cautious on:
Quick-Service Restaurants: Investors hold mixed views on Domino’s and Popeyes’ handler Jubilant FoodWorks and KFC and Pizza Hut operator Devyani International. While demand remains subdued, there is interest in the companies' strategies to navigate the slowdown. For example, Jubilant FoodWorks introduced initiatives in the second quarter, such as a waiver on delivery fees and reduced order thresholds. Both stocks have a 'buy' rating from Citi and a target price of Rs 700 and Rs 213, respectively.
Quick Commerce: There is growing concern over the potential impact of quick-commerce players on traditional retail. DMart parent, Avenue Supermarts Ltd., for instance, faced questions regarding margin pressures and store growth risks. Citi has a 'sell' rating on the stock with a target price of Rs 3,500.
Jewellery: Titan Co. garnered attention over potential margin pressures due to rising competition and the growing adoption of lab-grown diamonds. Investors were more comfortable with Kalyan Jewellers India Ltd. due to successful franchise expansion and improved returns on capital employed and free cash flow. Citi has a 'neutral' and 'buy' rating on the respective stocks.
Other Retail Segments: Trent’s aggressive store expansion plans raised doubts about execution risks. Citi has a 'buy' rating on the stock with a target price of Rs 9,350. Paint companies like Asian Paints and Pidilite faced concerns about rising competitive intensity, while Bata and Page Industries remained on the watchlist for potential turnaround indicators.
Staples and Media
In staples and media, investors questioned pricing strategies amid ongoing high food inflation and the extent of urban slowdown. Brands like Varun Beverages, Godrej Consumer Ltd., and Hindustan Unilever Ltd. stood out for their ability to adapt to evolving demand dynamics with their internal initiatives.
However, 'buy' rated ITC faces an overhang from a possible GST rate hike and margin challenges, Citi noted. In media, Zee Entertainment has a 'sell' rating and a target price of Rs 118.
