Valuations are not factoring in changing scenario; initiated with ‘UW’ and TP of Rs 1,120
Avenue is one of the most efficient retailers, globally… with its DMart stores generating revenue per square foot of $530 versus $450 for Walmart Inc (WMT) in FY19. Even as investors take cues from global retailers to map the growth opportunity for DMart, the company’s high starting point for store efficiency, amid rapid digitisation, may challenge any such standard evolution thesis, in our view.
…but the retail landscape is changing… In our view, retail in the electronics and apparel categories in India may well follow the global playbook of increasing online penetration – but grocery is likely to be different. The success factors will likely include: (i) express delivery for groceries; and (ii) low fulfillment costs. While this is open to debate, we believe online grocery in India will be best served via a decentralised model.
…with implications for revenue growth… The bedrock for DMart’s success is Everyday Low Price (EDLP)— scale-driven sourcing and operating efficiencies are reinvested in pricing for a virtuous cycle. Competitors are now pivoting their business models with a focus on lower pricing for grocery. Rising competition may blunt DMart’s first-mover advantage.
…and operating margins… Margin dilution from DMart Ready may be higher than the market estimates, on account of cannibalisation of in-store sales. Investors may also be underestimating the disruption from digitisation.
…which is not factored into stock valuations… Even as markets are likely factoring in >30% earnings growth for DMart over the next 10 years (FY19-29), our base case estimates factor in a 24% CAGR. We see downside risks to our estimates if price competition continues to rise and online fulfillment accelerates. On FY21 P/E, DMart trades at 60x vs. the 35x average for discretionary stocks in our coverage.