Stock corner: ‘Reduce’ on Avenue Supermarts, target price at Rs 1,300

By: | Published: April 16, 2019 12:29 AM

In light of increased aggression from offline retail giant as well as Big Basket, entry of Flipkart’s SuperMart, Amazon Pantry and pressure on gross margins, we maintain ‘Reduce’ with a target price of Rs 1,300.

‘Reduce’ on Avenue Supermarts, TP at Rs 1,300‘Reduce’ on Avenue Supermarts, TP at Rs 1,300

Avenue Supermarts (DMart) has held on to its lowest cost retailer USP despite onslaught of online and offline players. The company has achieved this by sticking to its everyday low price (EDLP) strategy – a typical consumer basket is 10% cheaper than the most expensive seller in our sample space.

However, this has come at the cost of 170bps gross margin compression from the peak in Q3FY18. In this note, we also delineate our channel checks at six DMart Ready stores, delve in to store-level economics and present our inferences on the format.

In light of increased aggression from offline retail giant as well as Big Basket, entry of Flipkart’s SuperMart, Amazon Pantry and pressure on gross margins, we maintain ‘Reduce’ with a target price of `1,300.

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We compared DMart Ready’s prices with peers in the online retail space for a basket of 27 essential household products and found that 52% are the cheapest at DMart. Also, we conclude that on an aggregate, a typical consumer basket at DMart comes at a 10% discount (excluding credit card offers) to the most expensive seller.

However, with heightening competition, DMart’s gross margin has come under pressure (180/170bps dip in Q2FY19/Q3FY19). Further, we believe, the company has optimised its cost items and hence, we see limited scope for margin expansion.

Based on our analysis (channel checks across six stores in Mumbai), we infer that a typical DMart Ready outlet is likely to achieve breakeven if it clocks an order rate of 16 or more per day with a basket value of `1,500.

We also infer that stores which receive 10 or less orders per day for a basket size ranging from `1,000-1,800 are likely to post negative Ebitda margin. DMart is a strong play on the retail sector’s transition from the unorganised to organised segment.

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