After the acquisition of the retail and wholesale businesses of Future Group (that includes brands like Big Bazaar, fbb, Foodhall, Easyday and Nilgiris) Reliance Retail is stronger than ever before in the retail scene in India.
The subsidiary of Reliance Industries Limited (RIL) received an investment of Rs 7,500 crore from Silver Lake Partners this week and according to two different Bloomberg reports citing sources, the company is set to KKR and Amazon are in talks to invest $1 billion and $20 billion in the business, respectively.
Should investors of Avenue Supermarts be concerned about Reliance Retail's rise?
The grocery business in India dominates the retail market in the country, with a 65 percent contribution and an estimated valuation of $560 billion.
However, organised grocery makes for only 5 percent of the retail market, with the strong grasp of traditional kirana stores in the segment.
The Future Enterprises deal brings a 33 percent increment in Reliance Retail's grocery revenue and the combined entity is expected to have 2 times the revenue in comparison with Avenue Supermart's DMart. While RR may be the leader, it does not increase the count of modern trade stores in India, which makes analysts believe that DMart is still a sizeable player, in the number two position and, its business will not be derailed by the recent progress in the former.
HSBC analysts has maintained a ‘buy' rating on Avenue Supermarts with a target price of Rs 2,750,
"We think DMart has the right business model and its low-cost approach to retailing is a key competitive advantage. DMart is sitting on ample liquidity and, in our view, is in a unique position to fuel its store expansion in a cost effective manner, a fact that may be less appreciated in the context of the near-term lockdown," it said in a note on 1 September.
Jefferies also has a 'Buy' rating on the stock with a target price of Rs 2,600.
"The organized segment contributes less than 5 percent to the grocery market, which forms two-thirds of the Indian retail market. This puts Avenue Supermarts in a sweet spot, with acute focus on customer value, product quality, productivity and profitability. Online and offline competition is rising but it is too early to worry. Covid-19 is a headwind for FY21, but we expect a gradual improvement, driving a 25%+ EPS CAGR over FY20-23E," the global brokerage said.
"Premium valuations have to be viewed in the context of strong opportunity, best in class execution, strong growth and limited ways to play the strong retail theme. Volatility due to Covid-19 and price-led competition are key risks," Jefferies added.
Further, DMart's attraction to its customers is pinned on the Every Day Low Cost (EDLC)- which offers quality products at competitive prices. The supermarket chain is able to achieve this from its high productivity and low operating costs (it owns most of its stores).
Jefferies pointed out that the company has a cluster-based approach - over 85 percent of its stores are concentrated in the West and South of India- that helps the brand.
The brokerage expects DMart to bounce back in financial year 2021-22, after gradual improvement from the COVID-19 disruption.
Amnish Aggarwal, head of research at Prabhudas Lilladher, as quoted in Economic Times, said that while Reliance Retail would become a behemoth, it would still not disrupt the trajectory for Avenue Supermarts. He said, "DMart has a very different consumer target, and they are selective in geographies. They have their own strategy. It does not disrupt the overall momentum for the company. RIL is not a threat to DMart."
Aggarwal has a "hold" rating on Avenue Supermarts.
Following the launch of JioMart, Reliance Retail has set a stage for the online sale of grocery from Kirana stores.
Analysts pointed out that DMart may be behind on its online grocery segment, a requirement that will be needed to be addressed with investment in technology.
Avenue Supermarts, which was listed in 2017, has continued to defy analysts expectations and jump multi-folds from its issue price of Rs 299.