Avenue Supermarts rating – Buy: Pricing edge over online players is intact

We conducted a comprehensive pricing survey for more than 100 SKUs across all major online grocery retailing platforms including Dmart. The objective was to assess how consumer safety and convenience-led rush (due to spread of COVID-19) to online groceries may have shaped the value retailing dynamics, and what it means for players such as Dmart, which have built their low cost business model with pricing as their competitive edge.

Our findings: (i) Dmart still commands one of the most competitive prices compared to online and offline players; (ii) Reliance’s JioMart competes neck and neck with Dmart; (iii) Amazon is relatively more competitive than other platforms such as Big Basket or Flipkart, but Dmart appears ahead of its online rivals, on average, in this sample survey.

Why it matters: As the COVID-19 crisis began a year ago, investors worried whether (i) players such as Dmart would find it hard to compete with online players given Dmart had a very limited online presence; (ii) this rise of online may even allow online players get an edge in pricing too, which could impact long-term growth prospects of Dmart. Our survey indicates that Dmart’s pricing edge is still being maintained and its pricing is superior to most of its online rivals, on average, in more than 100 SKUs spread over 16 categories. Dmart has also upped its online delivery game across key cities. It appears well prepared to mitigate the impact on any potential disruption.

Q4FY21 preview and outlook: We expect Q4 revenue to be better than Q3 (23% y-o-y revenue growth), led by gradual normalisation in footfalls. We expect a strong revival in FY22e (40% y-o-y sales growth), aided by strong SSSG on a benign base and acceleration in network rollout, which should serve as the key catalyst.

Dmart remains one of our key structural ideas in India consumer: (i) Dmart remains sharply focussed on serving (value-seeking) lower to middle class consumers; (ii) it uses best pricing as the competitive edge, which it achieves from its large procurement scale, sharply tailoring SKU mix and managing extremely low costs; (iii) even a sustained pandemic disruption for months has not changed any of these basics, and we believe Dmart is a winning business model for lndia, where modern grocery retailing is still at low single-digit penetration; (iv) we expect network rollout to accelerate from FY22e and believe revenue and profits are likely to more than double between FY21e and FY23e, which should stop multiples from de-rating. We maintain our Buy rating and TP of `3,500. Extended lockdowns are a key downside risk.