Consumer Discretionary Q1 FY26 results preview – Quarter likely to be a mixed bag

Our consumer discretionary company universe is set for a mixed performance in Q1FY26, with overall revenue projected to grow by ~18% YoY in Q1FY26, driven by a few outliers, both positive and negative. Excluding the strong growth from new age businesses (~49% growth YoY) and headwinds faced by paint companies (~2% growth YoY, negative), our universe is still likely to grow at ~17%. We anticipate continued margin pressure as same store sales growth (SSSGs) remain weak, ranging from negative to lower single-digits for most. We expect jewelry, F&G, paints, apparel, footwear, and new age to clock ~20%, 16%, 2%, 16%, 7% and 49% YoY revenue growth in Q1. Margins for our discretionary universe are expected to contract by ~80bps to 9.6%, primarily due to weak SSSG and elevated quick commerce (QC) burn. Ex-new age businesses, we anticipate largely flat margins YoY.

Weak SSSG to impact growth: Q1 performance is anticipated to exhibit significant divergence across categories. (1) The jewellery sector is expected to maintain healthy growth (gold price-led). Buyer growth is likely to remain flat though. Note: Gold prices are up ~33% YoY in Q1. (2) Offline F&G is likely to see stable growth, supported by a slightly higher pace of store expansion this quarter. (3) In apparel, value retail continues its steady growth, although Trent’s growth momentum continues to moderate. SSSGs were notably impacted by early Eid and select sourcing disruptions. (4) Footwear segment continued to witness demand pressure in Q1, with mid-single-digit revenue growth estimated (on a low base) for our coverage companies (ex-Metro Brands). Metro Brand is anticipated to report double-digit revenue growth. (5) Paint companies are still grappling with weak demand and fierce competition, though Berger Paints is anticipated to outperform its rivals. (6) New age businesses like Nykaa, Swiggy, and Zomato are expected to sustain strong YoY growth as they continue to prioritize customer acquisition (24-60% revenue growth).

Margins stable (ex-new age businesses): Margins for our coverage are expected to contract by ~80bps YoY to 9.6% in Q1FY26, but stable (excluding new age businesses). In paints, while favorable raw material prices are likely to drive gross margin expansion, intense competition will likely offset these gains due to elevated operating costs (built in largely flat EBITDAM YoY). Footwear companies are likely to report margin expansion due to the low base from the previous year (~120bps YoY expansion built in). A slight improvement in margins (on a low base) is expected in apparel (~55bps YoY). F&G margins are likely to remain largely stable while jewellery margins (ex-bullion) are expected to expand ~35bps, courtesy better fixed cost absorption. In QC, while platform-funded discounts have moderated, Q1 is seasonally heavier on delivery costs. This along with dark-store-related expenses may keep overall QC burn elevated. However, its likely peaked (building in -INR 10bn QC losses across the two listed platforms). Overall, we build in 9.6% EBITDAM (vs 10.4% in Q1FY25) for our universe (EBITDA growth: 9.4% YoY).

Margin of safety missing: Discretionary categories (ex-value fashion, jewellery) continue to witness moderating growth with negative-to-low single-digit SSSGs. The sector, as suspected, has gone through a round of earnings downgrades (not over yet). Against this backdrop, valuations continue to remain punchy (most trade between 40-150x FY27 P/E).

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Source: HDFC Securities Institutional Equities

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