DMart rating: Maintain ‘buy’ with target price of Rs 2,750

A country of India’s size can easily accommodate three to four large-scale national players.

RIL’s acquisition of Future Group’s retail assets, leading to rising competition for DMART, can be viewed negatively, but impact on DMART should be negligible as the retail opportunity can support several winning players and consolidation is good. Maintain ‘buy’ rating and Rs 2,750 target price on strong execution, focus on value retailing, and network rollout potential.

Among other assets, this will include the entire business of Future Retail (FRLIN, not covered), with 290 large format stores and 990 small stores, which has implications for grocery retail industry dynamics.

It is quite tempting to think of an overall negative outcome for DMART and key points of contention are
whether the deal increases the scale and competitive positioning of Reliance (RILIN, CP Rs 2,319.40, Hold); secondly, if it augments its footprint, which will deepen its reach and capabilities for online grocery proposition; and thirdly, does it eventually mean that the longer term growth opportunity for DMART maybe curtailed? These concerns led to 3% correction in DMART’s stock price on the first trading day after the deal announcement (31August).

The exit of Future Group is indeed an industry-shaping event and one that highlights that winners will be few even though the opportunity for modern retailing in India is large. Growth will be captured by large-scale, efficient players that are relentlessly focussed on delivering a superior value proposition to consumer (through better prices, sharp assortments, and convenience). A country of India’s size can easily accommodate three to four large-scale national players.

We see this consolidation as a sign of rising barriers to entry, which is positive for DMART.

While RIL and Future Retail combined will be larger than DMART, we think it is unlikely to adversely impact DMART’s prospects for achieving low-cost procurement or terms of trade. In our view, DMART, with its Rs 250 billion of annual sales (which is likely to double in the next three years), crosses the threshold of scale that allows it to achieve optimal terms of trade from suppliers in the pursuit of its value retailing strategy, and this position is unlikely to be impacted relatively even after the RIL Future Group deal.