Avenue Supermarts: Downside risks validated

27 Jul 2023 , 10:38 AM

Recommendation: Reduce; Target price: Rs 3500

In its investor meet 2023, DMart flagged concerns regarding store additions, market share loss in Apparels and downside risks to SSSG due to easing inflation. Analysts of IIFL Capital Services reduce store additions to 50 in both FY24/25, leading to a marginal cut in their estimates. They believe that the company is now a sub 20% growth company, not just for now but even in the medium-to-long term. Amidst this, 73x FY25 PE for ~18% ROIC is not justified. Maintain REDUCE, TP of Rs.3,500. 

Risks to store addition pace: 

Among various issues, DMart has been grappling with post-Covid, company classified unavailability of real estate as its key concern. Moreover, its cluster-based strategy of opening new stores in vicinity of the existing stores and large land requirement (30k40k sq.ft area) have added more complexity to the issue. Due to this, bulk of store additions in the past 3 years has happened in smaller towns; but these towns have a lower throughput. The company intends to open more stores in larger towns, which was challenging in FY23 and will remain so in at least FY24. 

Share of GM&A expected to stay below pre-Covid: 

In Apparels, DMart has lost share to competition and is working to fine tune its assortment and offer the most basic apparels in the Value Fashion segment. While General Merchandise has bounced back from the Covid impact, efforts in Apparels, if successful, will take time to yield results. Hence, analysts of IIFL Capital Services believe that share of General Merchandise & Apparel (GM&A) is unlikely to go up from FY23 level of 23% to pre-Covid level of 28%, at least in the medium term. This, combined with easing inflation, will be a key risk to SSSG going ahead. 

Confident about scale-up of e-commerce business: 

On the positive side, management expressed confidence in developing successful business model in its e-commerce venture (DMart Ready) whereby expansion of operations will not lead to too much cash burn. Achieving breakeven in the business still remains work in progress. It has reduced delivery time of most orders to within 24 hours, driven by robust technology infrastructure.