Consumer Discretionary Sector in India Anticipates Continued Growth Amid Rising Costs

"While growth remains steady, margins will likely face pressure," stated Karan Taurani, executive vice president at Elara Capital, in the firm’s latest consumer discretionary quarterly preview. A notable divide is emerging within categories; premium products are gaining market share despite challenges faced by mass-market items.

In the alcobev segment, Radico Khaitan is projected to be among the top performers, with premium and above (P&A) volumes anticipated to rise approximately 29% year-on-year in Q2 FY27. This growth is driven primarily by increased demand for Magic Moments flavoured vodka and Morpheus whisky, with realisations up around 0.5%. Conversely, regular volumes may see a 15% decrease due to a high base in Maharashtra and Andhra Pradesh. Elara expects Radico’s gross margin to expand by 536 basis points year-on-year to around 49%, while EBITDA margin could increase by 420 basis points to 20.1%.

In contrast, United Spirits may see P&A volumes remain nearly flat after a decline of 1.3% in the previous quarter. Although a 9.5% rise in realisations is expected to drive P&A revenues, the popular segment could drop by about 22% amid policy challenges in Karnataka and Maharashtra. Increased advertising and promotional expenses could reduce EBITDA margin by roughly 260 basis points to 18.6%.

Beer volumes are also expected to rebound. United Breweries may record around 9% volume growth, supported by a recovery in Karnataka and Maharashtra, along with approximately 2% growth in realisations. However, rising input costs may lead to a reduction in gross margin by about 230 basis points, resulting in an EBITDA margin of approximately 6%, down 34 basis points year-on-year.

In retail, DMart is projected to achieve around 18% year-on-year standalone sales growth, buoyed by 7.5% like-for-like growth, FMCG price increases, and reduced discounting from quick-commerce competitors. The retailer has opened around 15 new stores, bringing its total to 518, which is a 20% increase from last year. Elara anticipates DMart’s gross margin to improve 36 basis points year-on-year to 14.6%, with an estimated EBITDA margin of around 8%, up 38 basis points from the previous year, although down 36 basis points sequentially.

Trent is expected to see standalone sales increase by about 18% year-on-year, aided by a 21.6% expansion in its fashion store network, reaching 992 stores for Zudio and 305 for Westside. However, like-for-like growth might remain in the low single digits due to seasonal shifts and competitor discounting. Increased fabric costs are likely to affect gross margin, expected to be around 45%, a decrease of 164 basis points sequentially, while EBITDA margin is estimated at 17.7%.

Nykaa stands out with anticipated growth, particularly in beauty and fashion, with Elara forecasting a 26.7% year-on-year rise in consolidated revenue. Beauty and personal care gross merchandise value (GMV) is expected to grow by 25%, while fashion GMV is predicted to jump by 42%, driven in part by its Nike business. Although the BPC take rate could decrease by 120 basis points sequentially to 60.1%, the BPC EBITDA margin is expected to improve by 136 basis points year-on-year to 9.7%. Overall, the consolidated EBITDA margin could reach about 8.6%, an increase of 186 basis points from the previous year.

QSRs are beginning to show signs of recovery sequentially, though inflation remains a concern for profitability. Jubilant FoodWorks’ like-for-like growth is expected to rise to around 3.5% from 2.5% in the prior quarter, aided by a 170-basis-point price adjustment. Meanwhile, Burger King India is expected to maintain its strong performance with around 12% same-store sales growth, and Westlife could see a rise to 6.5% from 4.3%. KFC, benefiting from value promotions, is projected to achieve around 8.5% same-store sales growth for Sapphire Foods and approximately 4.5% for Devyani International.

Despite the recovery in volumes, inflation in raw materials, wages, utilities, and rental costs is expected to compress margins somewhat. Elara projects Jubilant’s EBITDA margin to linger around 19.4%, while Sapphire’s KFC restaurant margin could decrease by 168 basis points to 15.2%. The EBITDA margin for Devyani is expected to decline by 109 basis points to 15.1%. Pizza Hut remains a weak point, with Sapphire's restaurant-level loss estimated at 3.1% and Devyani's contribution loss at 1.8%. Westlife's EBITDA margin is likely to hold steady year-on-year at 10.8%, although down 181 basis points sequentially, partially due to a 1.5% price increase introduced in September. Restaurant Brands Asia’s India EBITDA margin could decrease by 46 basis points to 13.8%.

Overall, Taurani emphasized that demand is not currently the primary constraint for most of the sector. Rather, the focus will be on how effectively companies can turn rising volumes, premiumisation, and store expansion into profitable growth during the September quarter.