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While the Avenue stock has lost around 4% on NSE since the Reliance-Future deal was announced, note that the shares have been fairly resilient from a medium-term perspective. (Photo: Mint)
While the Avenue stock has lost around 4% on NSE since the Reliance-Future deal was announced, note that the shares have been fairly resilient from a medium-term perspective. (Photo: Mint)

Does Reliance-Future Group union pose a threat to Avenue Supermarts?

The deal enables RIL to strengthen its leadership position in the retail market and widens the gap with other retailers such as Avenue and Trent Ltd. This means Avenue becomes a number two in a broadly two-player grocery retail market

In India’s extremely tough grocery retailing industry, Avenue Supermarts Ltd has proven its execution capabilities and has an enviable track record. Avenue runs the DMart supermarket chain of stores. With Reliance Retail Ventures Ltd planning to acquire a majority stake in Future Group companies, some are worried that this might pose a threat to Avenue.

True, a lot can potentially change when a large competitor becomes even larger. The deal enables Reliance to strengthen its leadership position in the Indian retail market and widens the gap with other retailers such as Avenue and Trent Ltd.

For perspective: Avenue had 216 large format stores at the end of June quarter. Reliance Industries Ltd’s FY20 annual report said it had 797 grocery stores while as per Q3FY20 investor update, Future Retail Ltd had about 290 Big Bazaar stores.

As such, Avenue becomes a distant number two in a broadly two-player grocery retail market. "Grocery revenue of Reliance becomes 2.5 times larger than Avenue post the transaction," said analysts from Credit Suisse Securities (India) Pvt. Ltd in a report on 31 August. "This could impact relative terms of trade and promotional support (greater share of brand funded promotions) from FMCG companies in favour of Reliance, thus improving its competitive position," Credit Suisse said. The broking firm added that, "In key cities for Avenue like Mumbai, Reliance strengthens its presence as it consolidates Future’s deeper reach."

"The considerable scale that Reliance Retail will enjoy (post Future Group deal) would also increase its bargaining power with suppliers like FMCG firms, vendors for general merchandise, logistic partners etc," said analysts from Jefferies India Pvt. Ltd in a report on 30 August. FMCG stands for fast moving consumer goods.

While the Avenue stock has lost more than 3% on NSE since the Reliance-Future deal was announced, note that the shares have been fairly resilient from a medium-term perspective. From its pre-covid highs in February, the stock has shed just about 12% so far, which isn’t bad in these uncertain pandemic times.

To be sure, some do believe that Avenue’s standing in the Indian retail market won’t be disturbed much by the recent consolidation in the sector. “A country of India’s size can easily accommodate 3 to 4 large scale national players. We see this consolidation as a sign of rising barriers to entry, which is positive for Avenue Supermarts," wrote analysts from HSBC Securities and Capital Markets (India) Pvt. Ltd in a report on 1 September.

According to Varun Singh, analyst at IDBI Capital Markets and Securities Ltd, “Essentially, Avenue is a supply chain wonder and if other retailers try to match the company’s relatively low product prices, it will be very tough for them to survive. As such, it will be a while before Reliance is able to eke out synergies from the Future deal despite the massive scale after the alliance."

Meanwhile, the pandemic disruptions make FY21 outlook ugly for companies including Avenue. During the June quarter, Avenue’s revenue performance improved every month. Still, the company’s earnings per share declined sharply by 86% year-on-year to merely Rs0.77, disappointing the Street. With the lockdown easing, profitability is expected to improve. While that augurs well, prevailing social distancing norms would mean consumers would restrict their visits to the physical stores. One consequence of this is the rise in online shopping, which has increased. But Avenue doesn’t seem too perturbed. Last month, during its yearly analysts call, Avenue reiterated its stance of not aggressively foraying into the ecommerce play. The company said it is confident and positive about the brick & mortar format and would continue its focus on that.

Investors too, don’t seem overly affected by these trends going by the Avenue stock’s expensive valuations. The shares currently trade at a valuation multiple of almost 140 times trailing twelve months earnings. Going ahead, a faster pace of recovery in revenues may help sustain the high valuations.

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