Disruption in retail? Avenue Supermarts has a strong competitor in JioMart

Cost efficiency provides DMart an edge, but competitive intensity is growing

Reliance Industries' announcement related to its retail business, Reliance Retail, which includes its online grocery business JioMart, impacted sentiment towards Avenue Supermarts. In an otherwise bullish market when Sensex was up 1.2 per cent, the stock of Avenue Supermarts, which operates the popular chain of DMart hypermarkets, shed 6.5 per cent on Thursday. This adds to the decline of 7.6 per cent seen post results last weekend.
 

At the annual general meeting on Wednesday, Reliance Industries' (RIL's) chairman and managing director, Mukesh Ambani announced that RIL has received interest from strategic and financial investors for Reliance Retail and it would get some on board in the next few quarters. This partly indicates RIL's commitment and plans for the retail business, which along with JioMart's tie-up with WhatsApp and local kirana stores means potential increase in competition for players like DMart.
 

While the impact would be felt across the retail industry, it becomes more crucial for Avenue Supermarts' investors, given the stock's extremely rich valuations of 83 times FY21 estimated earnings.

For now, many analysts believe that it would not significantly impact DMart given its strong moat.
 

Varun Singh, analyst at IDBI Capital says, "Avenue Supermarts has strong cost efficiency in place, which gives it strong power to offer value (products below maximum retail price). This would continue to bode well for DMart." Owned stores, no last-mile cost, strong warehousing efficiency and direct procurement are some key levers in favour of Avenue Supermarts. Thus, Singh believes it will be a tough task even for players like Reliance Retail to beat Avenue Supermarts.
 

Vishal Gutka, analyst at Phillip Capital shares a similar view. "The large, financially strong listed grocery retailer has a unique model, which would continue to give it an edge over other organised players." However, there would be some correction in Avenue Supermarts' valuation in the near term, mainly due to the sentimental impact and given that despite slower growth its stock valuation is still pricey, he adds.
 

What is driving the strong footfalls for Avenue Supermarts is its product mix, which is tilted towards grocery (over 50 per cent of revenue). Reliance Retail is currently more focused on consumer electronics.
 

But, the combined strength of Reliance Retail and JioMart - strong financials, large client base, sourcing efficiency and technology cannot be ignored. Reliance Retail is India's largest and most profitable retailer with revenue of Rs 1.6 trillion and operating profit of Rs 9,654 crore in FY20. And, Nomura estimates its operating profit to almost double to Rs 18,400 crore in three years.
 

In fact, these attributes would come handy in executing RIL's larger retail strategy, which some analysts believe is a potential threat to players such as DMart.
 

To give a perspective, within a short span of launch, JioMart is witnessing cumulatively 2,50,000 daily orders day across 200 cities. Reliance Retail also sources over 80 per cent of fresh fruits and vegetables directly from farmers. Some analysts believe Reliance Retail, including JioMart, would make the market more competitive.
 

To summarise, even as DMart is a well-established retailer with strong financials and a robust business model, competitive intensity is likely to increase. And, this could keep a check of stock valuations.