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Avenue Supermarts founder Radhakishan Damani.
Avenue Supermarts founder Radhakishan Damani.

The curious case of the resilience of Avenue Supermarts’ stock

  • The Avenue stock has recovered after declining post Q4 results, surprising some analysts
  • The June quarter would be a washout, as revenues take a beating owing to the lockdown impact

Shares of Avenue Supermarts Ltd are now just 8% lower from their 52-week highs in mid-February. Avenue runs the DMart chain of retail stores. Last month, investors had received a reality check after its subdued commentary on April sales during the March quarter results announcement. But, since then, the stock staged a smart revival.

This is indeed striking, given the pressure on consumption demand due to the pandemic. Plus, it is not as if Avenue derives all its revenue from the sale of essential products, where demand has been relatively resilient. In FY20, food and non-food (fast-moving consumer goods or FMCG) categories contributed 52.4% and 20.3% to revenues, respectively. General merchandise and apparel, where sales has been hit the most during lockdown, accounted for 27.3% of revenue. Note that shares of FMCG firms, Nestle India Ltd and Britannia Industries Ltd, fell 12% and 7.7% from their respective 52-week highs. This is even though they earn all their revenues from the sale of food products.

“Even among the defensive set of stocks, the Avenue stock has surprised me," said an analyst at a domestic institutional brokerage, requesting anonymity. But, some are convinced about Avenue’s business prospects. Rajiv Sharma, head of research, SBICAP Securities Ltd, said: “In Avenue’s case, it’s not so much as what they are selling in terms of essential or not, but more about at what price points they are bringing value for the price conscious Indian consumer. Here, Avenue has a moat."

To be sure, despite virus-led disruptions, Avenue clocked healthy 23% revenue growth for the March quarter. Naturally, this growth would be tough to replicate in this quarter given the lockdown. Avenue has said that revenues in April fell over 45% year-on-year. There was some improvement in May.

Even so, there are challenges. Some expect Avenue’s mix to deteriorate with the general merchandise and apparel segment being impacted more. This is a higher-margin segment and, as such, would affect overall margins.

Sharma of SBICAP said: “The competitive landscape is changing with competition (Reliance Retail and several startups including Amazon and Flipkart) attempting to aggregate kiranas and digitizing at the hyperlocal level. Such changes suggest that Avenue should equally be aggressive about its D-Mart Ready initiative as it is about the offline store addition."

In the interim, though, if earnings growth drops more than expected in FY21, then valuations may well get a reality check. After all, Avenue’s high growth versus other consumer firms is one reason for its appeal.Its shares trade at a whopping 115 times FY20 earnings. Its efficiency metrics are far ahead of peers. “If DMart cannot clock 36000-37000 per square feet of revenue (roughly what it managed in FY19 & FY20), as people choose to avoid crowded places, then the very heart of its efficiencies could get challenged, in our view," said analysts from JM Financial Institutional Securities Ltd, in a report on 25 May.

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