While the impact would be felt across the retail industry, it becomes more crucial for Avenue Supermarts' investors, given the stock's extremely rich valuations of 83 times FY21 estimated earnings.
For now, many analysts believe that it would not significantly impact DMart
given its strong moat.
Varun Singh, analyst at IDBI Capital says, "Avenue Supermarts
has strong cost efficiency in place, which gives it strong power to offer value (products below maximum retail price). This would continue to bode well for DMart." Owned stores, no last-mile cost, strong warehousing efficiency and direct procurement are some key levers in favour of Avenue Supermarts.
Thus, Singh believes it will be a tough task even for players like Reliance Retail
to beat Avenue Supermarts.
Vishal Gutka, analyst at Phillip Capital shares a similar view. "The large, financially strong listed grocery retailer has a unique model, which would continue to give it an edge over other organised players." However, there would be some correction in Avenue Supermarts' valuation in the near term, mainly due to the sentimental impact and given that despite slower growth its stock valuation is still pricey, he adds.
What is driving the strong footfalls for Avenue Supermarts is its product mix, which is tilted towards grocery (over 50 per cent of revenue). Reliance Retail
is currently more focused on consumer electronics.
But, the combined strength of Reliance Retail and JioMart - strong financials, large client base, sourcing efficiency and technology cannot be ignored. Reliance Retail is India's largest and most profitable retailer with revenue of Rs 1.6 trillion and operating profit of Rs 9,654 crore in FY20. And, Nomura estimates its operating profit to almost double to Rs 18,400 crore in three years.
In fact, these attributes would come handy in executing RIL's larger retail strategy, which some analysts believe is a potential threat to players such as DMart.
To give a perspective, within a short span of launch, JioMart is witnessing cumulatively 2,50,000 daily orders day across 200 cities. Reliance Retail also sources over 80 per cent of fresh fruits and vegetables directly from farmers. Some analysts believe Reliance Retail, including JioMart, would make the market more competitive.
To summarise, even as DMart is a well-established retailer with strong financials and a robust business model, competitive intensity is likely to increase. And, this could keep a check of stock valuations.