Home / Markets / Mark To Market /  Avenue Supermarts’ valuations show how narrow markets have become

Domestic consumption has been a highly popular theme among investors in Indian equities in recent years. So, stocks of Hindustan Unilever Ltd and Nestlé India Ltd trade at 70-80 times trailing earnings, while their earnings growth has been only in the teens lately.

So, what happens when a company such as Avenue Supermarts Ltd comes along and offers a play on the consumption theme as well as higher growth? Evidently, the markets get delirious. Avenue, which runs DMart supermarkets, now trades at 122 times trailing earnings. Its earnings growth is far more attractive—in the first three quarters of FY20, earnings have grown by nearly 45%.

Avenue’s valuations have been unreasonably high for some time now. But with the consumption theme gaining in popularity, and with investors’ options increasingly limited, flows into the Indian markets have been inflating stocks such as Avenue and Nestlé India even further.

For a while, it was thought that Avenue’s shares also benefitted from a so-called scarcity premium, because of low floating stock. But a recent placement of shares to institutional investors was lapped up, showing there is enough appetite even with float increasing.

Graphic by Santosh Sharma/Mint
View Full Image
Graphic by Santosh Sharma/Mint

“Institutional investors holding the stock are of the long-only kind who don’t bother too much about near-term earnings growth projections and valuation multiples based on them. Besides, the lack of decent alternatives in the markets mean they are ending up paying a premium for companies where there is a proven track record of earnings growth," says the head of research at an institutional brokerage firm, requestingy anonymity.

Note that Avenue’s stock has risen by as much as eight times compared to its initial public offering price of 299. Its market capitalization now stands at 1.55 trillion, making it among the top 20 stocks in the country by size.

Of course, even at current valuations, there are more than enough fans. In a report on 9 January, analysts at Ambit Capital Pvt. Ltd said, “Valuations (which seem high) will fade quickly as earnings compound 23% over the next decade."

But there are detractors too. HDFC Securities Institutional Research has been pointing out that Avenue’s revenue per store is declining and that its working capital efficiency ratios are showing signs of peaking.

The biggest risk for the stock, however, is the assumption of high earnings growth for years to come. But if there are investors with deep pockets who are willing to bet on this outcome in the long term, talking of Avenue’s valuations based on current earnings may well be a futile exercise.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Recommended For You
Edit Profile
Get alerts on WhatsApp
Set Preferences My ReadsFeedbackRedeem a Gift CardLogout