One pattern that I have observed repeatedly over the years in the market is around how sectoral trend emerges, grows and then falters.
Sectoral trend typically starts with the leader starting to report strong & accelerated growth. This could be an outcome of many things including some industry wide changes or something else; but this factor is something that will be clear later on with the benefit of hindsight.
This is followed by the 2nd tier players also reporting improved growth rates.
With multiple players reporting strong growth, the theme catches market’s attention and thus there is strong demand for these stocks that pushes the valuation higher for everyone.
Initially everyone wants to bet on the leader and thus that stocks re-rates the most.
But after a while the 2nd tier players starts looking attractive because- from their smaller base, they start growing faster than the leader and since the leader has already re-rated, their valuation are relatively at discount to leader.
So, money then starts flowing into 2nd tier stocks and they get re-rated massively. So much so that they can start trading at higher multiples then the leader itself. Because at this stage market is more focused on growth rates rather then leadership and quality.
Then comes a point wherein money starts flowing into tier-3 or the bottom of the quality pyramid stocks in the sector. Because not only these players would have also started reporting good numbers, their valuation would be much lower than Tier-1 & Tier-2 players who have already re-rated. And market participants who have missed the trend earlier now wants their share of the move and thus the demand flocks towards these tier-3 players.
During this entire phase, as the demand of these sectoral stocks increases, supply starts increasing in the form of new IPOs, existing players raising QIP (generally from tier-2 & 3 players who’s ROCEs are not that high to accommodate such new found high growth) and then promoter selling.
Eventually there comes a point wherein supply outpaces demand significantly and that results in topping out of the sector. This is purely a technical top as growth in underlying businesses would still be good for a couple of quarters; but the valuations have already discounted that growth and incrementally there isn’t enough market demand to push the sector higher.
At this time, most of who entered with tier-3 stocks at the later stages ends up losing because they bought into poor businesses at the height of the trend.
And this is where a big takeaway for investors is, never get FOMOed into a sectoral trend at later stages in lower tier-3 names purely because you missed the rally in tier-1 & 2 companies. You might make some gains on paper initially, but the end realized outcome is never good.
What has happened in Jewellery stocks over last 1-1.5 years a good recent example of this pattern playing out;
Titan which is the leader started reporting improved growth from Q4FY23 onwards.
Then we saw Kalyan reporting strong growth and even higher than Titan.
Then we saw listing of Senco and that also reporting strong numbers.
During this period, Titan has re-rated from ~60x PE to now ~90x PE, Kalyan has re-rated from ~25x to ~120x, it is now trading at higher multiples then Titan.
Senco which was earlier trading at mid-teens multiple has now re-rated to ~50x earnings. It is now raising funds in just 1 year post its IPO as its ROCE at mid-teens is not sufficient to fund the high sectoral growth.
We have seen a recent IPO of P N Gadgil and add to this, PC Jeweller (absolute low tier-3 company) has been able to raise capital and is seeing investor’s interest.
So, everyone has been reporting good numbers, demand continues to increase as evident in re-rating across the board with demand shifting towards lower tier stocks and supply is also increasing.
At this stage, investors need to be cautious on what they are buying into within the jewellery space.
Currently, we see a sectoral trend emerge within Value Fashion;
Trent has been the leader within value fashion on the back of Zudio and has been reporting very strong numbers for many quarters now.
In last 3-4 quarters, we have seen V2 Retail also start to report very strong numbers.
In Q2FY25, we have seen even Vmart reporting acceleration in growth rate.
Recently we have seen a new listing in the sector of Style Bazaar Retail. Even Style Bazaar has reported good numbers for Q2FY25 (though there is some shift in season impact).
Another company Vishal Mega Mart is also looking to get listed shortly.
So clearly growth for the sector has a whole has improved, demand & rerating has started for tier-2 names and we are seeing supply also increasing.
Readers can access our research on V2 Retail and some other stocks here-
Sometime back I had highlighted in one of my tweets about an investment that is growing 3x its larger peer and that I would look to share my research on the same. V2 Retail is that stock, it is growing way faster than its larger peer V-Mart.
Disclosure:
Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.
“Registration granted by SEBI, and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”
“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”
“The securities quoted are for illustration only and are not recommendatory”
More details: https://www.surgecapital.in/disclosures
Stock specific investment disclosure:
V2 Retail- Invested. Not Traded in last 30 days. Active recommendation in Research Service
Trent- Invested. Not Traded in last 30 days. Active recommendation in Research Service
Titan- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service
Kalyan- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service
Senco- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service
V Mart- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service
Style Bazaar- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service
P N Gadgil- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service
P C Jwellers- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service
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