Avenue Supermarts hits fresh all-time high on footfall recovery hopes

Shares of the retail giant gain 17 per cent over the last week

Shares of Avenue Supermarts, the operator of DMart supermarket chain, have gained close to 40 per cent in the last two months, as optimism over a vaccine rollout has fuelled expectations of increased footfall in the seasonally strong third quarter. 

DMart’s operations had come under pressure after the government announced a nationwide lockdown to curb the spread of coronavirus and customers resorted to non-traditional (online shopping) methods to fulfil their demand for essential products. Concerns over increased competitive intensity, especially from large e-commerce players, saw the company’s shares correct sharply. 

However, the surge in volumes on online platforms could be coming down as the containment measures have been lifted. “As against popular belief of a significant rise in e-commerce business after the Covid outbreak, we note that monthly visits of customers on grocery retailing websites like Grofers and BigBasket have fallen down by 50 per cent,” said Varun Singh, research analyst at IDBI Capital. “We believe this is positive for offline retailers (especially modern trade) like DMart.” 

This strengthens the case of a timely recovery in business ahead of the key festive season. The company had pointed to a gradual improvement in demand and footfall, which were sluggish owing to intermittent lockdowns after its second-quarter results. With issues on the supply side largely addressed, all eyes were on the festive season. Typically, the festive season sales account for 27 per cent of the full-year revenues of the company.

What should help the footfall is the company’s significant cost advantage over its competitors, allowing it to offer higher discounts. Margins, too, should see an increase as the share of private-label products rise and general merchandise volumes — which were impacted during the lockdown — see a gradual uptick. 

Though brokerages are positive on the stock, given the retail opportunity and good execution thus far, valuations continue to command a significant premium. The stock trades at an FY22 price-to-earnings multiple of 74x. Only 12 of 28 analysts have a “buy” rating on the stock; there are seven “hold” and nine “sell” recommendations.