Rural areas to drive future growth in retail, smaller cities are outpacing metros: Axis Securities

Mumbai (Maharashtra) [India], August 22 : The retail sector has faced a challenging start to the fiscal year 2025, as the Q1FY25 review highlights a subdued consumer sentiment, primarily driven by a mix of prolonged heat waves, a slowdown in discretionary spending, and a lighter-than-expected wedding season, according to the latest report by Axis Securities.
These factors have collectively dampened consumption demand in the discretionary space, leading to mixed financial performances across the sector.
The report points to a clear divergence between the premium and value segments within the retail market. While the premium segment has managed to sustain its growth momentum, the value segment has shown only a modest recovery, with results varying across different companies.
Rural areas are expected to drive future growth in volume, buoyed by the prospects of a better monsoon and a gradual rural recovery. The report notes that despite the challenging environment, most companies have maintained or even increased their store opening guidance.
This expansion, particularly into smaller towns, underscores the long-term growth potential that remains strong for the sector.
The performance of retail companies in Q1FY25 has been mixed. Premium retailers have continued their growth, while value retailers have seen a gradual recovery.
However, the Quick Service Restaurant (QSR) segment remains particularly weak, struggling to regain its footing amid ongoing consumer caution.
Companies have observed some rural growth, which is expected to improve further, driven by factors such as increased government spending, a normal monsoon, easing inflation, and rising urban remittances. Despite these positive signs, EBITDA margins have come under pressure due to negative operating leverage, signalling a challenging road ahead for profitability.
Axis Securities' report emphasizes the retail sector's long-term growth potential, driven by the ongoing formalization of the market. The Indian retail landscape is still largely unorganized, particularly in smaller cities and towns, where there is significant growth potential.
With rising disposable incomes, consumers are increasingly shifting towards branded products, creating opportunities for both premium and value retailers.
Smaller cities and towns are outpacing metro areas in growth across categories such as Apparel, QSR, and Footwear. This trend is fuelled by higher aspirations for branded products and rising disposable incomes, making the retail sector a compelling investment opportunity.
In the short term, the demand for discretionary spending remains sluggish, and the recovery in margins is expected to be gradual. However, the medium-term outlook offers a more optimistic view. Domestic consumption could deliver better returns in the current volatile environment, with rural demand set to improve further due to increased government spending, a normal monsoon, and rising urban remittances.
Consumer price inflation is expected to start receding eventually, while raw material prices are anticipated to remain stable. This could pave the way for a gradual recovery in the retail sector, with companies well-positioned to capitalize on the structural growth opportunities in the market.