Reduce Avenue Supermarts, target Rs 1,300: Edelweiss Securities

Edelweiss Securities has a reduce call on Avenue Supermarts with a target price of Rs 1,300.

The current market price of Avenue Supermarts is Rs 1,410.40.

Time period given by the brokerage is one year when Avenue Supermarts price can reach the defined target.


View of the brokerage-
Standing true to lowest price claim; margin under pressure: We compared DMart Ready’s prices with peers in the online retail space for a basket of 27 essential household products and found that 52 per cent are the cheapest at DMart. Also, we conclude that on an aggregate, a typical consumer basket at DMart comes at a nearly 10 per cent discount (excluding credit card offers) to the most expensive seller. However, with heightening competition, DMart’s gross margin has come under pressure (180/170bps dip in Q2FY19/Q3FY19). Further, we believe, the company has optimised its cost items and hence, we see limited scope for margin expansion.

DMart Ready- Volumes to drive profitability: Based on our analysis (channel checks across six stores in Mumbai), we infer that a typical DMart Ready outlet is likely to achieve breakeven if it clocks an order rate of 16 or more per day with a basket value of Rs 1,500. We also infer that stores which receive 10 or less orders per day for a basket size ranging from Rs 1,000-1,800 are likely to post negative EBITDA margin.

Outlook and valuation- Valuation a hitch; maintain ‘REDUCE’: DMart is a strong play on the retail sector’s transition from the unorganised to organised segment. However, in light of margin pressure and rising competitive landscape, we maintain ‘REDUCE/SU’ with a target price of Rs 1,300 (35x 12-month forward EV/EBITDA). At the current market price, the stock trades at 33.8x FY21E EBITDA.