Avenue Supermarts rating: Hold; Online scale-up a must for future

Avenue SuperMarts (DMart) has aced the offline retail segment via its execution prowess, a rarity in food & grocery (F&G) retailing. Organised F&G has clocked stupendous growth and remains the biggest migration play in retail. In fact, Reliance Retail’s takeover of Future Retail has further consolidated the industry, entrenching these two strong players deeper. Our bottom-up analysis reveals DMart has potential to open ~400 stores more (FY20: 214; FY20–22e target: 60).

In online retail, DMart has been conservative and has a lot of catch-up to do with peers. In light of the hastened online migration and JioMart’s aggression, a compelling/aggressive strategy is imperative for DMart’s future growth. Maintain Hold.

F&G retailing still lucrative, demands execution; DMart aces: Despite the humungous opportunity in F&G, most players have failed on execution, given wafer-thin margins. DMart is among the few to have profitably mastered the game via its locations and ELDP/EDLC focus, which have created a virtuous network loop. The Reliance Retail-Future Group deal has consolidated the market further. DMart’s execution has been proficient, which makes it highly probable that it would also partake of the benefits of this opportunity with Reliance.

E-commerce scale-up imperative for DMart; JioMart now aggressive: F&G will continue to be dominated by offline/brick & mortar (B&M) in the near future (13% of organised F&G by FY25E). However, given the pace of e-commerce growth, it is not too long before it becomes sizeable. We believe time is ripe for players to get the model right before scaling it up. A comparison with other providers shows DMart Ready must ramp-up in many categories, if it has to replicate its offline success online.

Outlook: All priced in—We remain positive on DMart given the long-term structural play, lean cost structure, strong liquidity support and a superior execution record. In addition, its innovation and agility to respond to change (DOW, reduction in discounting, etc) gives it an advantage over other retailers. However, owing to lofty valuations, we maintain ‘HOLD/SP’ with a TP of Rs 2,157 (50x FY22e EV/Ebitda). The stock is trading at 51.5 FY22e EV/Ebitda. Upside risks stem from faster-than-expected store expansion and increasing traction in DMart Ready. Downside risk remains from higher aggression from competitors and waning of DMART’s EDLP moat.