Jefferies has initiated coverage on Avenue Supermarts with a Buy rating and a target price of Rs 2,600. With a contribution of 65 percent, the grocery market which estimated at $560 billion, is the largest retail market in India. The grocery market has seen 10 percent CAGR in the past eight years and the growth rates should sustain, led by macro factors.
Within the retail market, organized grocery has one of the lowest penetrations at less than 5 percent. While this highlights opportunity, traditional (kirana) stores have a strong foothold, although there is a gradual shift towards organized.
“The organized segment contributes less than 5 percent to the grocery market, which forms two-thirds of the Indian retail market. This puts Avenue Supermarts in a sweet spot, with acute focus on customer value, product quality, productivity and profitability. Online and offline competition is rising but it is too early to worry. Covid-19 is a headwind for FY21, but we expect a gradual improvement, driving a 25%+ EPS CAGR over FY20-23E,” global brokerage Jefferies said.
“Premium valuations have to be viewed in the context of strong opportunity, best in class execution, strong growth and limited ways to play the strong retail theme. Volatility due to Covid-19 and price-led competition are key risks,” Jefferies added further.
The organised grocery market is fairly consolidated with Reliance Retail (RR) as the leader, which would further consolidate its position post the acquisition of Future Retail.
Avenue Supermart (DMart), while a distant number two, is still a sizeable player. Both these players dominate in the organised retail market, Jefferies noted.
However, the competition in the market is increasing with the rising presence of online players like Amazon and Big Basket and also RR's JioMart scaling up.
Dmart has carved out a niche through its Every Day Low Price (EDLP). This is in contrast to the sporadic discounting by most online/offline peers. The focus is on quality offerings with an optimized portfolio at competitive prices.
“DMart's EDLP is underpinned on Every Day Low Cost (EDLC), backed by high productivity and low operating costs. A cluster-based approach also helps - for example, more than 85 percent of DMart stores are in the west and south. Unlike peers, DMart also owns most of its stores. Investments in technology also ensure agility,” Jefferies said.
According to the brokerage, DMart ranks fairly high on efficiency parameters versus peers. Its FY20 Ebitda margins at 8.5 percent have been better than most peers’. Despite store ownership, its RoCE have been around 15 percent over the past 5 years with tight control on working capital and the balance sheet is net cash.
Like other retailers, the brokerage believes that FY21 would likely be a tough year for DMart due to Covid-19 disruption although there is a gradual improvement. It forecasts a bounce-back in FY22 and stability by FY23, which would result in a strong revenue growth led by robust store additions and a double-digit SSG, translating into a 25%+ earnings CAGR.
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