The majority of the restaurant, retail, and hotel management teams have stated that the strong growth acceleration seen in February–March Q4FY2022 has persisted in April–May and will help companies to clock strong performance in Q1FY2023, which is why brokerage firm Sharekhan is bullish on the consumer discretionary sector. The brokerage has given a buy rating on the shares of ABFRL for a target price (TP) of Rs370, Bata India with a TP of Rs2,370, Indian Hotels Company with a TP of Rs286, Trent with a TP of Rs1,415, Wonderla Holidays for a TP of Rs285 and PVR for a TP of Rs2,250.

Sharekhan has said in a note that “In the second edition of Investor Knowledge Series, we highlight companies which are likely to post strong results in Q1FY2023 in a tough earnings environment from India Inc affected by multiple headwinds (including slowdown in the demand environment and higher input cost inflation). Based on resilient earnings investment theme, we have selected companies from the Consumer discretionary sector, which are likely to post strong earnings performance in Q1FY2023, have steady growth outlook, with strong balance sheet and decent valuations."

As per the brokerage, during the COVID-19 pandemic, out-of home/discretionary consumer goods & services were severely affected due to restriction on mobility, cut on discretionary spends to buy more of essentials and restriction put by government authorities affecting retail store operations. Footwear, branded apparels, restaurants/fine-dine, beverages & confectionaries, multiplexes, hotels and amusement parks companies’ dismal performance during the pandemic. However, the same companies witnessed strong performance in H2FY2022 with a decrease in the pandemic, easing of lockdown restrictions and pent-up demand resulting strong sales during the last two quarters of the fiscal. Most discretionary companies saw revenues recovering to pre-covid level in Q4FY2022, the brokerage has further stated.

“Managements of most of the retail, restaurant and hotel companies stated that the strong growth momentum witnessed in February-March Q4FY2022 have sustained in April-May and will help companies to clock strong performance in Q1FY2023. Further with the scare of the pandemic receding, the sectors such as footwear, amusement parks, multiplexes are likely to witness higher growth due to stable operations in the quarters ahead. Thus, FY2023 is expected to be one of strongest year for discretionary companies as recovery in footfalls and higher ticket purchases led by pent up demand would lead strong revenue growth. Further better operating leverage will boost profitability of these companies the coming quarters," Sharekhan has claimed in its note.

The recent correction in the broader markets provides an opportunity to invest in quality discretionary picks which have significantly corrected from its 52-week highs, trading at relatively reasonable valuations with strong earnings visibility led by recovery from the pandemic and sustainable earnings growth in the long run. Further, some companies have revamped business strategies (scaling up the omni channel, digitalisation at front and backend of business, reducing store size to improve store fundamentals and increasing variability at operational cost level to reduce direct expenditure) during the pandemic to make the business immune from any pandemic like uncertainties in the near future, Sharekhan said.

“Our preferred picks based on the theme are Aditya Birla Fashion & Retail (ABFRL), Trent, Indian Hotels Company, Bata India, Wonderla Holidays and PVR. From the non-coverage companies Varun Beverages (VBL), strong player in the domestic beverage space, is expected to post strong performance in the coming quarters due to expected improvement in the consumption of out-of-home products (resulting in the strong volume growth in FY2023)," said the brokerage.