DMart, Trent, Jubilant among Bernstein's top India bets; check complete list

Bernstein has, in a recent report, given insightful ratings and coverage for seven leading companies operating in the Indian retail and restaurants space. The report goes in-depth into the intrinsic growth potential, challenges, and strategic outlook of these companies, favoring retailers over restaurants in the prevailing market scenario.

Retail Sector: The Preferred Long-Term Bet

Bernstein's analysis thus reflects a strong preference for retail over restaurants, though both look equally attractive on the grounds of long-term growth. The important reasons that have elicited such preference include a greater opportunity for gaining market share for organised retailers, more steady revenue growth and relatively softer valuations in the retail space.

Unorganised Market: A Goldmine for Retail Growth

The high proportion of the unorganised market is one of the major drivers for organised retail, with around 90 per cent in retail, specially in groceries and apparels, compared to 60 per cent in the restaurant industry. This points to a huge opportunity for growth in the presence of lesser competition for the organised players to expand. Further, the business model of retail becomes simpler and more scalable because the restaurant sector involves multi-brand, multi-cuisine operations.

Retail Growth Consistency and Profitability

Over the last ten years, Indian retailers have reported revenue growth of approximately 23 per cent CAGR versus 13 per cent CAGR for restaurant players. This fact, coupled with better profitability on the retail side, renews Bernstein's conviction for retail stocks at this juncture in the cycle. The softer valuations in retail relative to restaurants also present an attractive entry point for investors.

Top Retail Picks: DMart, Trent, And ABFRL

• DMart: Bernstein estimates DMart as a "thoroughbred for the long haul." Being the second-largest grocer in India, DMart has consolidated its value-based positioning with consumers by always selling essential grocery items at the lowest price. With best-in-industry operational efficiency, DMart is well-positioned for significant network expansion, supported by strong FCF generation. Bernstein estimates a one-year TP of Rs 6,300, implying a 27 per cent upside from CMP.
• Trent: Known as the "Indian Idol" of retail, it has become the fastest-growing and highest-margin apparel retailer in India. Strong positioning in Westside, Zudio, and Star should keep it well-placed for continued growth in the future. While many have suspected it to be highly valued, Bernstein is convinced about Trent's operational excellence and scalability. Bernstein initiates coverage with one-year TP of Rs 8,100, implying a 17 per cent upside from CMP.
• ABFRL: With both profitable and high-growth segments, Bernstein remains cautious due to high debt, an inefficient cost structure, and a fragmented brand portfolio. Bernstein has factored in these challenges to arrive at a one-year TP of Rs 270, at 16 per cent downside from CMP.

Restaurant Sector: Fragmentation and Selective Growth

While India's restaurant industry holds promise for growth, Bernstein's report points towards a marketplace that is fragmented along cuisines on offer down to the regulation environment. The organised restaurant market, though substantial in size, is highly competitive, and large, listed chains collectively have around 3 per cent share of the total market.

Top Restaurant Picks: Jubilant, Devyani, Westlife, and Sapphire

• Jubilant: Domino's still remains one of the strongest brands in the pizza segment, powered by potent growth drivers such as regular store additions and innovative menu. Bernstein has estimated a 21 per cent upside for Jubilant and has given a one-year TP of Rs 780.
• With KFC in the under-penetrated chicken category, Devyani stands to benefit from this trend. Successful Vaango outlets and a promising acquisition of KFC Thailand add to the growth potential of the company. Bernstein estimates a one-year TP of Rs 205, presenting a 17 per cent upside over CMP.
• Westlife: Bernstein remains conservative on Westlife's growth prospects despite the brand presence of McDonald's. Therefore, Bernstein has set a one-year TP of Rs 640, implying a 22 per cent downside from CMP, given the inflexible cost structure of the company and the yet-to-be-tested vectors of growth.
• Sapphire: Even though Sapphire has reported good numbers, especially from KFC, Bernstein believes the company needs to find other growth vectors to sustain current valuations. Bernstein recommended a wait-and-watch approach and gave a one-year TP of Rs 1,650, which is a very modest 3 per cent upside over CMP.