With expectations of good growth, the stock of Avenue Supermarts
has surged over 21 per cent in the last three months, significantly outperforming the broader markets
and peers. While the BSE Sensex is down around 8 per cent during the same period, the BSE FMCG index was too has declined about 5 per cent. Also, since DMart
is considered as a defensive stock delivering reasonable returns and stable growth, the volatility and decline in overall markets
amid the economic slowdown has also led to higher investor attention.
Having said that, barring a couple of blips, the company has delivered good growth in sales, profits and cash-flow in the past. And there are factors such as store expansion, low-pricing strategy, among others, which suggest that its medium-term growth levers are also intact. On an average, analysts expect the company’s sales and profits to grow between 25-30 per cent annually over the next two years.
The company’s aggressive focus on store addition that improves its medium term growth potential is being taken positively by the Street. After adding 21 stores in FY19, the company added 8 stores in June 2019 quarter as against just 2 stores a year ago period. As of June 2019, total number of stores stood at 184. The company’s aim to consider store expansion through long-term leases (as against owned stores currently), if executed as per targets, would lead to faster store additions. Notably, the new stores are also expected to be bigger in size, offering further growth opportunity.
According to analysts at ICICI Securities, “The strategy to open larger stores bodes well for it since the company would have enhanced shelf space for high margin products such as general merchandise and apparels.”
The company’s everyday low cost (EDV)/everyday low price (ELP) business model should also help abate the expected competition-related pressures. Under this model, customers get products at a relatively cheaper price as compared to those of DMart’s competitors. The store expansion efforts should supplement Avenue’s EDV/ELP strategy.
According Rajeev Anand, “Though aggressive store expansion would moderate the revenue per square feet growth of Avenue (see graph), the latter’s strong store expansion plans go well with its basic EDV/ELP strategy. This underlines the company’s strong growth prospects in the medium term.”
Apart from expectations of a shift in customers’ shopping preference towards modern trade such as DMart, what could further help is Avenue Supermarts’ focus on e-commerce channels. However, how it deals with competition from existing strong players such as Big Basket and the new comers would be interesting to watch.
High competitive intensity could also restrict Avenue’s gross and operating profit margins. An per Edelweiss Securities’ report of July 31, on Avenue’s FY19 annual report, though notes, “The management intends to continue to focus on being the lowest-cost retailer and has guided they would be happy with a 15 per cent gross margin and about an 8 per cent EBITDA margin (FY19 levels), anything beyond is likely to be spent on advertisements, or passed on to consumers via sales promotions.” The performance in the next couple of quarters should give more clarity on growth and margin fronts.
For now, as per Bloomberg poll of analysts, 9 of 22 have a ‘buy’, 5 have ‘neutral/hold’ and 8 have ‘sell’ rating on the stock. Their average target for the stock, which is currently at Rs 1,619, is Rs 1,425. Investors with some risk appetite may consider buying it on corrections.