Analysts positive on retail sector post Reliance Retail-Silver Lake deal

According to a study by Anarock Retail, India’s retail industry ranks 4th in the world in terms of size, and accounts for 10 per cent of India's GDP
Covid-19 and Reliance Industries (RIL) – seem to be the only two names that now command the power to move the markets in either direction. The latter with investment in its telecom venture (Jio Platforms) and now the retail business vertical have put the spotlight back on retail space in India. With RIL’s retail arm, Reliance Retail, sealing its first stake sale deal with Silver Lake, analysts see the sector consolidating yet growing going forward and if reports are to be believed, the Mukesh Ambani-owned company could be in talks to offer $20 billion stake to Amazon.

The consolidation in the retail sector began in August when RIL took over the entire business of Future Retail for Rs 24,713 crore. Analysts termed the exit of Future Group as an ‘industry shaping event’ – the one that highlights that winners will be few even amid a vast opportunity for modern retailing in India.

“Growth will be captured by large-scale, efficient players that are relentlessly focussed on delivering a superior value proposition to consumers (through better prices, sharp assortments, and convenience). A country of India’s size can easily accommodate three to four large scale national players,” said Amit Sachdeva, India equity strategist, and consumer & retail analyst at HSBC Securities India in a report dated September 1.  

According to a study by Anarock Retail, India’s retail industry ranks 4th in the world in terms of size, and accounts for 10 per cent of India's gross domestic product (GDP). The market size of the industry was around $0.79 trillion in 2017 and is estimated to reach $1.75 trillion by 2026, growing at a CAGR of 9 – 11 per cent. Another report pegs the size of the grocery retail market in India at around $545 billion, with organised retail penetration of around 4 per cent. The branded Indian Apparel Retail market has a size of Rs 1.9 trillion, which is roughly 42 per cent of the Rs 4.5 trillion overall apparel market in India, says an analysis by Axis Securities.

Recovery underway

A September 7 note by Edelweiss suggests that the first leg of retail recovery is underway, with the majority of the store network operational.

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“Offline channels are now fully open, with online sales already surpassing pre-Covid-19 level and are tracking strong growth. Companies have also used various initiatives like WhatsApp and video messages to engage with customers during the lockdown. Besides, commencement of the festive season is expected to provide a fillip in ensuing days,” wrote Nihal Mahesh Jham, analysts at Edelweiss in a co-authored sector report with Abneesh Roy and Prateek Barsagade.

 

With Reliance Retail aggressively establishing itself, leveraging on online sales via JioMart, analysts believe incumbent players need to re-orient or scale-up their businesses, go for mergers, and cash-in on niche segment to exploit customer loyalty.

According to HSBC Securities, the RIL-Future Retail deal is unlikely to adversely impact Avenue Supermarts (DMart’s) prospects for achieving low-cost procurement or terms of trade. “In our view, DMart, with its Rs 25,000 crore in 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,” they say. The brokerage has “Buy” rating on the stock with a target price of Rs 2,750 on the back of right business model, low-cost approach to retailing, and unique position to fuel its store expansion in a cost-effective manner.

For AK Prabhakar, head of research at IDBI Capital, Trent and Avenue Supermarts offer a better risk-reward ratio and suggests buying these stocks on a dip. “DMart, being a cash-rich company and having an attractive selling price proposition is also a safe bet. However, the company needs to push towards online sales and expand its brick and mortar stores to compete with RIL-Future Retail,” he says.

Suvarna Joshi, senior research analyst at Axis Securities, picks Trent courtesy its strong parentage (Tata group), niche carved out in ethnic apparel and a 99 per cent share of private labels; and VMart due to presence in tier 2/3/4 cities, and cheaper price offering than Reliance Trends and Big Bazaar (Future Retail).

Deepak Jasani, head of retail research at HDFC Securities, meanwhile, cautions investors to wait for correction as all the positives are adequately priced-in at this point. “Buying aggressively at these valuations will not give good returns in the long-term,” he says.

So far in the calendar year 2020, Avenue Supermart, Trent, and V-Mart have outrun the benchmark S&P BSE Sensex by advancing 21 per cent, 23.5 per cent, and 18 per cent on the BSE, respectively, ACE Equity data show. In comparison, the S&P BSE Sensex had slipped 7.4 per cent till Wednesday.


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