INSUBCONTINENT EXCLUSIVE:
Mumbai: Morgan Stanley has forecast a downside of 23 per cent in shares of Radhakishan Damaniowned Avenue Supermarts, which owns DMart,
owing to competition-related headwinds.
The stock, which has rallied nearly four times from its issue price of Rs 299 since listing two
years ago, ended down 1 per cent at Rs 1,460.95 on Friday following the report.
Morgan Stanley initiated coverage on Avenue Supermarts with
an underweight rating and a target price of Rs 1,120.
Morgan Stanley’s bear case target price is Rs 700 and bull case target is Rs
1,850.
Avenue Supermarts has a standout business model but rising competition may blunt the supermarket chain’s first-mover advantage,
said Morgan Stanley.
Moreover, margin dilution from DMart Ready may be higher than market estimates and investors may also be
underestimating the disruption from digitisation, said Morgan Stanley.
“Margin dilution from DMart Ready may be higher than the market
estimates, on account of cannibalisation of in-store sales
Importantly, DMart Ready financials are disclosed only at the end of the fiscal year,” it said.
The concept of everyday low pricing has
been a key factor behind DMart’s success
While competitors may have underestimated the power of leverage but they are now focusing their business models with a focus on lower
pricing for grocery, the financial services firm said.
All this is not factored into the valuations of the stock, which is trading at 60
times versus 35 times average for discretionary stocks in Morgan Stanley’s coverage.
Morgan Stanley is factoring in a base case of 24 per
cent compounded growth in earnings over the next ten years but it sees downside risks to estimates if price competition continues to rise
and online fulfilment accelerates.
Avenue Supermarts had reported a 2.1 per cent year-on-year rise in profit after tax at Rs 257 crore for
the December quarter, while revenues jumped 33.2 per cent to Rs 5,451crore.
Bloomberg data showed 11 of the 19 analysts tracking the stock
have a ‘sell’ rating on it, while five analysts have ‘buy’ recommendation and two analysts have a ‘hold’ rating.
Kotak
Institutional Equities also warned about price competition faced by DMart.
“Competition from well-funded online players in the grocery
space seems to be on the rise, resulting in some dilution of DMart’s lowest product price proposition
We believe DMart will continue to focus on revenue growth (via both offline and online channels), though future margin expansion may be
tepid notwithstanding its higher private label focus,” said Kotak Institutional Equities
The brokerage has retained ‘sell’ rating on Avenue Supermarts and revised target price to Rs 945 from Rs 915 due to rolling forward of
