STREET STILL BETS BIG ON AVENUE SUPERMARTS

Store expansion, new format growth triggers; near-term upsides could be limited given the strong rally

Avenue Supermarts’ stock recently hit its all-time high levels, and in the process crossed the $14.75billion mark (~ 1 trillion) in this week’s trade. The stock, which has already become a multi-bagger, up five-fold, from its IPO price, has gained about 42 per cent from the start of the year.

The re-rating of some of the consumer names over the past couple of quarters, coupled with the fact that the stock is now part of MSCI, has added to the lure. At the fundamental level, however, the Street is putting its faith on the well-run company with high earnings visibility.

Abneesh Roy of Edelweiss Securities said, “Investors prefer predictability and sustainability of cash flows, which can turn a company into a compounding machine. It is not without reason that the stock is in demand and is trading at these multiples in line with some of the other consumer names.”

What makes it stand out for investors, according to analysts, is its consistent growth in sales, margins and net profit, driven by strong demand from consumers as well highly efficient operations. On parameters such as sales per square foot and cost per square foot, it is way ahead of competition.

While the company’s sales per square foot stood at ~32,719 for FY18, the same for its competition is less than half in most cases. Similarly, operating costs as a percentage of sales at eight per cent are a third of larger peers such as Spencers, More and Future Retail.

Aditya Soman and Aditya Gupta of Goldman Sachs say Avenue’s low gross margin indicates it may be re-investing its competitive sourcing advantages back into consumer prices to drive footfall. Further, its low cost of operations will allow it to maintain its leadership in low-price segment. This is a virtuous cycle of low prices feeding into high demand, faster turnover of products, better negotiated prices and lower costs, said an analyst.

While some of these factors are known, analysts believe there could be additional triggers such as expansion plans of current format stores and the DMart Ready format. DMart Ready (order online and have the goods delivered home), which is housed under its 100 per cent-owned e-commerce subsidiary Avenue E-commerce, operates with 58 stores across the country, enabling the company to reach a wider geographical area. Given that this format is also a low-cost model, the company has avoided stocking perishables such as frozen food and vegetables, which entails additional logistics cost. With the expectation of improving demand, revenue growth should be strong going ahead, said an analyst.

For the regular store format, the company has expanded from being confined to just two to three states a few years ago, to a presence in 11 states through its 155 stores — accounting for about 60 per cent of the retail demand area. The company has reiterated that it will stick to its cluster strategy and centralised procurement, maximising its savings while tapping into demand.

Its ‘owned store’ model and sweating of assets is one of the reasons it is ahead of competition, which has to contend with higher cost of rentals, especially when the stores come up for renewal. Most stores for DMart break even in 1-3 years, allowing the firm to expand rapidly to new areas.

The other positive trend for the company is the improvement in mix, with the share of higher margin categories like apparel going up, even as grocery share has come down by about 200 basis points to 51 per cent, in FY18.

While most analysts believe the company can deliver earnings growth of 2530 per cent over the next few years, valuations at 74 times its FY20 earnings estimates are on the higher side. Investors can look at the stock on dips with a three-year holding period.