Should Avenue Supermarts investors worry about the rise of Reliance Retail?

Mumbai: A stronger-than-ever Reliance Retail may become a behemoth in the Indian retail industry with Future group business acquisition, but the huge scope in an under-penetrated industry and a niche it has carved for itself may help Avenue Supermarts stay afloat, and thrive too.

However, the company that operates hypermarkets chain DMart may have missed the bus, as far as the online grocery segment is concerned, and that may be one area it will need to address, said analysts.

The Future group deal will add nearly 33 per cent of incremental grocery revenue to Reliance, and the combined entity will have 2 times grocery revenue compared to Avenue Supermarts.

DMart has 216 large format stores and is growing its network in clusters in India. In comparison, Future Retail has around 290 large format (Big Bazaar) stores, while Reliance Retail has a total of 797 grocery stores, including the large format, smaller Reliance Fresh, and cash and carry stores.

However, this will not derail the DMart story, say HSBC analysts as they maintained a ‘buy’ rating on the stock, 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,” HSBC analysts said in a note on September 1.

They pointed out that even after the deal, the net count of modern trade stores in the industry doesn’t change, and they believe the growth opportunity for organised modern trade – which is just about 4 per cent of the overall grocery market, is not diminished. The deal is also unlikely to adversely impact the Avenue Supermarts prospects for achieving low-cost procurement or terms of trade, HSBC analysts said.

“In our view, DMart, with its Rs 250 billion of annual sales (which is likely to double in the next three years), crosses the threshold of scale that allows it to achieve optimal terms of trade from suppliers in the pursuit of its value retailing strategy and this position is unlikely to be impacted relatively even after the RIL-Future Group deal,” said HSBC analysts

HSBC analysts drew a comparison with German hard discounters such as Aldi, which continue to thrive in the US despite having formidable large-scale domestic players as competitors.

“Success is driven by sharp focus on the target segment, where DMart excels,” they said.

The stock of Radhakishan Damani-backed Avenue Supermarts is ranked one of the best performers on the bourses among debutants.

The stock, which was listed in 2017, had more than doubled on its debut from its issue price of Rs 299. It has consistently defied analysts’ expectations and jumped manifold. It currently trades at Rs 2,283.20.

The Covid-19 pandemic did weigh, but the stock has still gained 24 per cent for the year to date.

Amnish Aggarwal, head of research at Prabhudas Lilladher, said organized retail formed only 7-8 per cent of the overall retail market in India, leaving enough scope for existing players and even potential ones to grab a pie.

While Aggarwal agreed that Reliance Retail would become a behemoth, he said it would still not disrupt the trajectory for Avenue Supermarts. “With this acquisition, Reliance becomes very strong in the retail space. More importantly, Future group’s supply chain is also coming in, along with the stores, which had become a household name. On-ground presence of RIL will be very strong,” he said.

“However, 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,” he said, adding that he has a ‘hold’ rating in Avenue Supermarts.

Online grocery: Missed opportunity?
Analysts expressed concerns that Avenue Supermarts may have missed the bus as far as the online grocery market is concerned.

“While Future group will help scale up Jiomart, for DMart, online grocery is a missed opportunity to an extent as the space grew 2-3 times amid the lockdown,” he said.

“If the recent behavior of the consumer may be sticky and become a habit. For RIL, they have an IT backbone as they are a telecom company, and it is easier for them to scale up in online and offline channels,” he added.

Multiple estimates predict eGrocery, which is currently less than 0.3 per cent of the total grocery market to continue to grow 8-10x over next 4-5 years reaching $ 25-30 billion in sales supported by rising internet penetration, increasing digital awareness and embracing delivery convenience.

According to India Brand Equity Foundation (IBEF), the share of Indian organized retail will double to 18 per cent in 2021, from 9 per cent in 2017. Likewise, e-commerce is expected to more than double to 7 per cent from the previous 3 per cent in the same period.

Players such as BigBasket, Grofers, Flipkart and Amazon made the most out of the opportunity amid a nationwide lockdown due to the Covid-19 pandemic, and Jiomart was also launched at an opportune time to reap benefits from the shift in consumer behavior.

“If Reliance Retail’s growth is aggressive, they may take up lion’s share of the business from the local kiranas. Reliance definitely has an edge, and DMart will to commensurately invest in building the omnichannel model,” said Deven Choksey, Group Managing Director, KR Choksey Investment Managers.

Both Avenue Supermarts and Reliance Retail are focusing on the grocery segment, as it constitutes around 59 per cent of the total retail business in the industry, pointed Choksey.

“If I have to play the retail story, I would be more comfortable with Reliance,” he added.

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