While Goldman Sachs saw a strong upside in the stock, many debated that though the company was delivering strong earnings, the price was beyond justifiable in terms of valuations.
In reaction to Goldman Sach’s rating, Avenue Supermarts’ shares soared as much as 18.3% to Rs1,217 on BSE, its highest ever, in high volume trade. They pared some gains and closed 8.55% higher at Rs1,116.80.
The stock has multiplied 3.74 times from its issue price of Rs299 per share. It had more than doubled on the listing day.
“Avenue Supermarts is well placed to benefit from tax reforms as grocery market share shifts to the organized sector," Goldman Sachs analysts Aditya Soman and Aditya Gupta said in a note on Tuesday, while setting a 12-month target price of Rs1,586 for the stock, which was 54% higher than Monday’s close.
Goldman Sachs analysts argued that while Avenue Supermarts maintains low prices, with thin gross margins and light working capital, its cash return on capital invested (CROCI) remains better than that of its global retail peers.
They say the country’s most-profitable retailer is set to grow its EBIT (earnings before interest and taxes) by 13 times in 10 years, aided by this high growth, low margin and high return strategy.
For the June quarter, the company had reported a 47.5% rise in net profit from a year ago; its revenue rose 36.2%.
Goldman Sachs analysts agreed that Avenue Supermarts’ valuation appears stretched on a 12-month horizon, with a fiscal year 2019 price to earnings (P/E) ratio of 66 times as compared with the brokerage firm’s sector average of 40 times.
“However, we believe AVEU (Avenue Supermarts) can grow EPS (earnings per share) at 30% for the next 10-years, so we believe making a decision on near-term earnings could result in missing a long-term compounding opportunity," they said.
The biggest risk to their estimates is higher-than-expected competition from e-commerce, especially in winning over the large urban mass cohort, they added.
At Tuesdays’ close, Avenue Supermarts’ market capitalization stood at Rs69,697.76 crore ($10.7 billion) and it was the 40th most-valued stock on the Indian bourses, rising past Bharti Infratel Ltd and Nestle India Ltd.
Are the valuations justified?
Not everyone is optimistic, as Avenue Supermarts is the most expensive stock among major retailers in the world.
According to Bloomberg’s consensus estimates Avenue Supermarts trades at nearly 75 times one-year forward earnings, while Wal-Mart Stores Inc. and Costco Wholesale Corp. trade at 18.10 times and 25.35 times one-year forward earnings, respectively.
“Valuation is one of a major problem, and it is extremely elevated. Even as company is faring well, it is very hard to justify this kind of price," said Amnish Aggarwal, research analyst with Prabhudas Lilladher Pvt. Ltd.
In a note on 7 September, brokerage firm Prabhudas Lilladher maintained its ‘reduce’ rating on the stock, citing “bubble zone valuations".
Climbing the rich list
On Monday, Radhakishan Damani was ranked 30th most richest person in the country by Hurun India Rich List, a list of the richest people in India with a cut-off at Rs1,000 crore on Monday. Wealth calculations are as on 31 July. He was the fastest riser in the list and climbed 77 ranks as his wealth trebled to Rs29,700 crore.