Analyst Corner: Retain ‘sell’ on Dmart, revise DCV-based FV to Rs 1,530, says Kotak Institutional Equities

Competition galore. Covid-19 has accelerated existing grocery e-tailers’ order run-rates; we believe some of these customers may prefer the online channel even post pandemic. Dmart thus needs to bring more cities under its e-commerce network in order to maintain revenue momentum.

Competitive intensity would ensure that Dmart’s margins may not expand significantly going forward. We revise our DCF-based FV to Rs 1,530 (from Rs 1,480) as we roll forward to September 2021E. Retain ‘sell.

We believe online grocery retailers such as Jiomart, BigBasket, Grofers and Amazon Fresh/Pantry will continue to provide price competition to Dmart. Our product pricing data shows that price competition among retailers is increasing – in the product basket we track, Dmart was the lowest priced retailer for 14 out of 31 products in March. Due to higher competition its price gap versus competitors has shrunk, and in September, Dmart was the lowest priced retailer for only seven products.

Brick-and-mortar retail caters to a very hyper-local set of customers, and in that context we believe competitive landscape for Dmart may not change much post RR’s acquisition of FRL. We are more wary about the kirana digitisation programme being carried out by RR, Amazon, Flipkart, which may bring down kirana’s product acquisition cost and may make the local grocer more competitive versus Dmart.

Over time, this may drive away some footfalls from Dmart stores towards local stores.