Avenue Supermarts falls 2% as brokerages see rich valuation, rising competition

Avenue Supermarts shares fell nearly 2 percent intraday on June 13 as brokerages were mixed in their opinion after analyst meet.

Some brokerages felt valuations were moderated after recent correction but still rich and competition from e-commerce players was rising, but others believed company's value proposition and cluster-based strategy for store expansion with profitability being the key thrust area going ahead.

The D-Mart operator reported 18 percent YoY growth in Same-Store-Sales along with 33 percent YoY revenue growth in FY19 better than its internal estimates.

The company has improved performance on major retail parameters like SSSG, revenue per square feet, inventory turns and total bill cuts even in a challenging environment (intense price competition from online retailers). D-Mart's relentless focus on providing the lowest price to consumers continues to drive sales.

Management stated that store expansion was slower than expected (added only 21 in FY19 against 24 in FY18), as required permissions from regulatory agencies for construction did not come through on time.

D Mart expects store expansion to accelerate in a meaningful manner in FY20, as it has significantly strengthened its real-estate team to tackle issues.

The company plans to set up larger stores (50,000 square feet) versus an average size of 25,000-30,000 square feet so far, to enhance customer experience and provide better display and stock more high-margin apparel and general merchandise items.

At 1106 hours IST, the stock was quoting at Rs 1,302.30, down Rs 7.35, or 0.56 percent on the BSE. It corrected 12 percent in the last three months.

Here are views from brokerages after analyst meet:

Morgan Stanley

We have underweight call on Avenue Supermarts with a target at Rs 1,120 apiece as we see downside risks to estimates on price competition intensifying.

As per D-Mart, the price competition within the industry has increased in the last 18-24 months. Price differential between D-Mart and the competition has diminished.

The bedrock for D-Mart's success is everyday low price but rising competition may blunt D-Mart's first-mover advantage. In our base case, we assume 12 percent SSSG for FY20.

Jefferies

We have underperform rating on the stock with a target price at Rs 1,230 as rich valuations and rising competitive intensity make risk-reward unattractive.

Avenue is confident of its own positioning amid rising competition and sees enough growth opportunity for all players. Company is targeting higher new store openings going ahead.

JPMorgan

Key message from management was controlled aggression and consistency. Management noted a need for accelerated store additions.

D-Mart intends to stick to the core of a ‘Low-cost, Low-price’ proposition. Valuations have moderated, but are still rich. We have limited catalysts for an earnings upgrade.

HSBC

We retain buy call on the stock with a target price at Rs 1,650.

The company highlighted that its focus on value retailing remains its key proposition and core operating focus is to maximise throughput.

Company will continue its cluster-based expansion and maintain its pricing edge. It has a winning model with grocery retailing a large opportunity.

PhillipCapital

After the second analyst meet we came back positive about long-term prospects as its business is run very efficiently.

The management seems to be unperturbed about increasing competition from well-funded e-commerce players or aggressive store expansion by other brick-and-mortar players. This we believe is because of a massive opportunity landscape, D-Mart’s cluster-based approach of store expansion, and its razor-sharp focus on providing ‘Everyday Lower’ prices to the customer.

Reliance Securities

The Management expects the younger stores to outpace the total growth, while it’s reasonable to assume the inflation growth rate for the matured stores. The company continues to focus on value proposition and cluster-based strategy for store expansion and plans to open a higher number of stores in FY20 vis-à-vis FY19 with profitability being the key thrust area.

Despite increasing competition and higher discounts across the industry, the company continues to deliver a better value proposition to the customers via low- cost operating model.

The company acknowledged that it has been extremely conservative on store expansion but now changing its stance to ‘controlled aggression’. D-Mart trades at expensive PE valuation of 55x/42x on consensus earnings expectations of FY20E/21E.