‘Unlock rally’ in hotel, multiplex, and retail stocks may fizzle out

Currently, the Street is ignoring shrinkage of balance sheets and delay in return to normalcy

The gradual relaxation of lockdown restrictions has improved sentiment towards stocks in categories, such as hotel, retail, and multiplex, which have been hit the hardest by the Covid-19 pandemic. Many stocks from these segments have gained 30-100 per cent in the past three months, outperforming the 26.5-per cent rise on the BSE Sensex.

There is little doubt that things now aren’t as bad as they were three-four months back and the market is now looking beyond the 2020-21 financials. However, the key issue is whether the rally will sustain.

According to G Chokkalingam, founder of Equinomics Research and Advisory, “We believe the rally in the stocks of categories, such as retail, hotel, and multiplex, is unlikely to sustain. The market is ignoring two key aspects — the balance sheet shrinkage because of losses during the pandemic period and the expected delay in return to normalcy.”

Dhananjay Sinha, director and head of institutional research at Systematix Group, shared a similar view. “Things may be looking better now. But, we believe categories like hotel, retail, and multiplex will continue to remain under pressure and underperform the overall market,” said Sinha, adding, “We prefer other stocks, such as those from the banking or automobile ancillary space, where earnings visibility and value addition are relatively good.”

What is still keeping the recovery outlook of these categories gloomy is the consumer buying behaviour amid income uncertainty. Some experts said even if restrictions are removed, a recovery in the economic status of households will not happen immediately. Besides, limited social events and people avoiding crowded/public places cannot be ruled out. These will have direct implications on business growth in these categories, taking a toll on operating leverage and, thus, the overall earnings.

While in the case of hotels, even though the lockdown is fully lifted, occupancy improvement will take time. Archana Gude, an analyst at IDBI Capital, said: “Earnings visibility is very feeble for hotels, though the September quarter should see sequential improvement. Unless there is earnings sustainability, hotel stocks are unlikely to get back their valuation multiples.”

For retailers, geographical mix and the nature of the product portfolio are key deciding factors. For instance, stocks such as V-mart will be in better shape, given their higher exposure to semi-urban and rural areas, while companies like Trent and Aditya Birla Fashion and

Retail, which have a major presence in tier-1/urban areas, will continue to feel the pain, said Akhil Parekh, analyst at Elara Capital. Essential consumer goods retailers, such as Avenue Supermarts, should witness less impact than those selling apparel and luxury goods.

In the case of multiplexes, though some analysts have a positive stance, footfall should be impacted by the rising preference for over-the-top platforms. Further, a likely delay in content releases and lower demand in the food and beverage segment (over 20 per cent of revenue) are the other key challenges.

Some analysts believe smaller/single-screen players, which have large a market share and are struggling with liquidity issues in this period, will pave the way for players like PVR and Inox Leisure, with relatively fast recovery. The jury, however, is out on this.

Also, many companies in sectors, such as multiplex and retail, have undertaken stringent cost-control measures and favourably re-negotiated rental cost.