ANALYSTS POSITIVE ON RETAIL SECTOR POST SILVER LAKE DEAL
Consolidation may pick up pace as larger players target acquisitions
Covid-19 and Reliance Industries (RIL) seem to be the only names that 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, has put the spotlight back on retail in India.
With RIL’S Reliance Retail sealing its first stake sale deal, with Silver Lake, analysts see the sector consolidating, and, if reports are to be believed, the Mukesh Ambani-owned company could be in talks to offer a $20-billion stake to Amazon.
Consolidation in retail began in August, when RIL announced acquiring Future Retail for ~24,713 crore. Analysts termed this an “industry-shaping event” – one that highlights winners will be few even amid a vast opportunity for modern retail in India.
“Growth will be captured by large-scale, efficient players that are focused on delivering a superior value proposition to consumers. A country of India’s size can easily accommodate three to four large-scale national players,” said Amit Sachdeva, India equity strategist and consumer and retail analyst at HSBC Securities India, in a September 1 report.
According to a study by Anarock Retail, India’s retail industry ranks fourth 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 $790 billion in 2017 and is estimated to reach $1.75 trillion by 2026, growing at a compound annual growth rate of 9-11 per cent. Another report estimates the size of the grocery retail market in India at around $545 billion, with organised retail penetration pegged at 4 per cent.
Recovery underway
A September 7 note by Edelweiss suggests the first leg of retail recovery is underway, with more than 50 per cent of the store network operational. Offline channels are fully open, with online sales surpassing pre-covid-19 levels, promising strong growth.
With Reliance Retail aggressively establishing itself, leveraging online sales via Jiomart, analysts believe incumbent players need to scale up their businesses, go for mergers, and cash in on niche segments.
According to HSBC Securities, the Ril-future Retail deal is unlikely to affect Avenue Supermarts’ (Dmart’s) prospects.
“Dmart, with its ~25,000 crore in annual sales, crosses the threshold of scale that allows it to achieve optimal terms of trade from suppliers in pursuit of its value retailing strategy and this position is unlikely to be impacted,” it said in a paper.
The brokerage has the “buy” rating on the stock with a target price of ~2,750 owing to its business model, a low-cost approach to retailing, and a unique position to fuel its store expansion in a costeffective manner.
For A K Prabhakar, head of research at IDBI Capital, Trent and Avenue Supermarts offer a better risk-reward ratio, suggesting 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 said.
Deepak Jasani, head of retail research at HDFC Securities, however, advises investors to wait for correction because all the positives are priced in at this point.
So far in the calendar year 2020, Avenue Supermarts, Trent, and V-mart advanced 21 per cent, 23.5 per cent, and 18 per cent on the BSE, respectively, the ACE Equity data show.
In comparison, the Sensex had slipped 7.4 per cent as of Wednesday.