India’s consumer discretionary sector is expected to grow 18% YoY in Q1 FY26, driven by strong growth in new-age businesses but dragged by weaker performance in traditional categories like paints and footwear, according to HDFC Securities. Despite growth in several sub-segments, margin contraction and valuation concerns are expected to weigh on overall sentiment.

Contents

Sector-Wide Growth Estimated at 18% YoY with Mixed Tailwinds Margins Seen Contracting by 80 bps Due to Cost Pressure and QC Burn Divergence in SSSG and Operating Metrics Across Categories Valuation and Earnings: Elevated Multiples Amidst Downgrades Investor Implication and Sector Watchlist

Sector-Wide Growth Estimated at 18% YoY with Mixed Tailwinds

According to the HDFC Securities report dated July 12, the consumer discretionary sector is likely to deliver a mixed performance in Q1 FY26, marked by 18% year-on-year revenue growth. The performance is being driven by a combination of high-growth digital-led businesses and sluggish traditional categories.

Growth Highlights:

New-age businesses are projected to grow 49% YoY, driven by online platforms, tech-enabled services, and direct-to-consumer (D2C) brands.
Jewellery segment is expected to grow at ~20% YoY, benefitting from strong demand and a stabilising gold price environment.
Food & Grocery (F&G) and Apparel segments are forecasted to grow at ~16% YoY, supported by urban demand recovery and festive stocking.
Footwear segment is expected to see muted growth of 7% YoY, with demand pressures visible in both value and premium formats.
Paint companies, traditionally defensive in nature, are expected to underperform, exerting a drag on overall discretionary sector growth.

The firm noted that same-store sales growth (SSSG) would diverge significantly across categories, with jewellery and value apparel retail expected to post steady to healthy performance, while discretionary categories like footwear and paints may struggle in Q1.

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Margins Seen Contracting by 80 bps Due to Cost Pressure and QC Burn

HDFC Securities expects margins in the discretionary segment to contract by approximately 80 basis points to settle around 9.6%, citing two key contributors—weak SSSG and elevated losses from quick commerce (QC) operations.

While newer platforms and digital-first brands are leading topline expansion, their profitability remains under pressure due to aggressive expansion and promotional intensity. Excluding new-age businesses, however, margins are expected to remain largely flat year-on-year.

The quick commerce segment, led by instant delivery models and high customer acquisition costs, continues to burn capital, impacting consolidated profitability for many consumer-facing brands involved in this space.

Divergence in SSSG and Operating Metrics Across Categories

The research report provides a nuanced breakdown of SSSG across consumer categories for the June 2025 quarter:

Jewellery: SSSG expected to remain healthy, supported by wedding demand and brand consolidation.
Offline F&G: Expected to post stable growth, aided by steady urban consumption and limited competition from e-commerce in Tier-2 and 3 markets.
Value Apparel Retail: Continues to show resilient growth, with formats like V-Mart and Zudio benefiting from price-conscious consumers.
Footwear and Paints: May report negative to flat SSSG, reflecting soft consumer sentiment and post-festive slowdown.

Valuation and Earnings: Elevated Multiples Amidst Downgrades

While revenue and margin expectations remain subdued for select categories, valuation multiples across the discretionary sector remain high, according to HDFC Securities. This divergence between earnings and price is a growing concern for analysts.

Several earnings downgrades have taken place in the run-up to Q1 results due to:

Slower than expected demand recovery in select urban segments
Pressure on margins due to input costs and promotional spend
Competitive intensity from both organised and unorganised players

The brokerage underlined that while long-term prospects for the sector remain robust, the near-term will continue to be volatile unless margin profiles improve and growth broadens beyond new-age categories.

Investor Implication and Sector Watchlist

Given the mixed signals, HDFC Securities suggests stock selection will be critical in the near term. Analysts expect investors to rotate selectively into categories with stable SSSG, margin visibility, and moderating valuations, such as jewellery and value retail.

Meanwhile, high-valuation stocks in the paint, footwear, and quick commerce segments may remain under pressure, especially if margin compression continues in Q1 earnings reports.

Key discretionary sector stocks likely to be closely tracked include:

Titan Company (jewellery and watches)
Avenue Supermarts (DMart) (value retail and F&G)
Trent and V-Mart (apparel retail)
Relaxo and Bata India (footwear)
Asian Paints and Berger Paints (paint segment)
Zomato and Blinkit (quick commerce exposure)

The report sets the stage for a highly sector-specific performance trajectory in Q1 FY26, with margin management and consumption resilience at the core of investor scrutiny.