The stock has turned out to be a multibagger not only for investors who bought the shares in its initial public offering (IPO) in March 2017 but also for those who invested in March 2020. It has not disappointed investors, who invested for medium- to long-term returns since its listing on March 21, 2017.
Sunil Shankar Matkar
September 22, 2021 / 02:12 PM IST
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Shares of hypermarket chain operator Avenue Supermarts Limited have risen more than fourteen-fold in the last four-and-a-half years despite a significant sell-off for more than a month in February-March 2020 on the Covid-19 outbreak and ensuing lockdown.
The stock has turned out to be a multibagger not only for investors who bought the shares in its initial public offering (IPO) in March 2017 but also for those who invested in March 2020. It has not disappointed investors, who invested for medium- to long-term returns since its listing on March 21, 2017.
It quoted at Rs 4,367 per share on September 21, rising 14.6 times or 1,361 percent compared to its IPO price of Rs 299. Even on listing day, it had more than doubled investors’ money, rising 114 percent to Rs 640.
If one had invested Rs 14,950 (Rs 299 issue price * one lot of 50 shares) in the IPO, the total value of those 50 shares would be Rs 2,18,350 today.
Avenue Supermarts has outperformed the Nifty50 and Nifty Midcap 100 by a wide margin in the last four-and-a-half years. The indices gained 92 percent and 74 percent respectively.
The stock has been marching steadily towards a market capitalisation of Rs 3 lakh crore; is is currently valued at Rs 2.82 lakh crore.
Business model behind rally
The rally has largely been attributed to its business model (being the lowest priced retailer), sales of everyday value retail products, a diversified revenue mix, operating performance, promoter track record, an efficient supply chain and reopening of the economy in the aftermath of the pandemic.
Avenue Supermarts, the D-Mart operator, is owned by billionaire investor Radhakishan Damani, who owned 74.99 percent equity shareholding in the company as of June 2021.
“Avenue Supermarts stock has offered a sustainable and secular rally. Reasons for this stellar long-term rally in the stock is attributed to being the lowest priced retailer and at the same time focusing on offering a wide range of everyday value retail products at one stop to customers,” said Ankur Saraswat, a research analyst at Trustline Securities.
Empirically, the store count has surged from 131 in FY17 to 234 in FY21 spread over 11 states. “Over the years, growing market share, a better and diversified revenue mix, increasing geographical footprint and cost efficiencies led to sustainable margins with predictable positive cash inflows,” Saraswat said.
The retail industry has been on a roller coaster for the past 1.5 years, with footfalls dropping dramatically due to the pandemic, and D-Mart was not spared from its impact.
However, “thanks to its business model, the reopening of the economy, and aggressive vaccination by the government, the retail business has increased as more customers are willing to shop in offline stores,” said Gaurav Garg, head of research at CapitalVia Global Research.
“One of the key advantages for D-Mart is that it has increased its margins by eliminating the middlemen, focused more on volumes by reducing the prices and efficiently uses its space and aggressively expanding into various states. D-Mart has been able to maintain consistent profitability and is an exceptional performer in its peer group thanks to its proven business model,” Garg added.
Jay Praksh Gupta, co-founder of Raise Financial Services, said a unique business model, consistent operating margins, the promoters’ consistent track record and an efficient supply chain, helped by a market conducive for packaged consumer products, had aided the stock rally.
Yet, retail format businesses like Avenue Supermarts may face a challenge from new=age companies like Big Basket and Grofers, Gupta said. “A lot would depend on how efficiently Avenue Supermarts adapts to the changes.”
Everyday low-cost model
D-Mart follows an everyday low-cost -everyday low price (EDLC-EDLP) strategy which aims at procuring goods at competitive price, using operational and distribution efficiencies and thereby delivering value for money to customers by selling at competitive prices.
“One thing which is unique for Avenue Supermarts is its distribution channel- factory/farm to D-Mart to consumer. This efficiency adds up to its operating margin,” said Gupta.
He added: “Another thing unique is its real assets location. Most of the stores are located at strategic locations and are owned, providing both capital appreciation and return on capital invested on real estate. The third important aspect is its financial leverage. The company is debt-free and cash-rich unlike most of other retail chains.”
After the June quarter earnings announcement, Neville Noronha, CEO and managing director of Avenue Supermarts, said the D-Mart Ready business continued its gradual expansion across the Mumbai Metropolitan Region (MMR) region, Ahmedabad, Pune, Bangalore and Hyderabad.
“Thus far the results on topline are very encouraging. The second wave {of Coid-19} has given further impetus to the business.”
“We have not seen any significant impact on our supply chain during the quarter. Our inventory is also gradually moving towards normal levels. Construction activity has also commenced at all our sites,” he said.
Several states had announced lockdowns to control the spread of second Covid wave during initial part of the quarter.
Earnings
In the quarter ended June, the company reported a 31.3 percent year-on-year increase in standalone revenue at Rs 5,032 crore; profit grew by 130 percent to Rs 115 crore from the corresponding period of the last fiscal year.
At the operating level, its earnings before interest, tax, depreciation and amortization (EBITDA) surged 103 percent year on year to Rs 221 crore in the June quarter; the margin expanded to 4.4 percent from 2.8 percent a year ago.
“Its long term net sales growth of 9.44 percent CAGR is quite impressive. The company posted stellar quarterly earnings number in June 2021. Now that Covid situation is normalising and chances of severe impact in case of a third wave of Covid hitting is lower, Avenue Supermarts can post impressive numbers in coming quarters,” said Gupta.
Is it expensive?
Experts say the stock looks expensive – and it has been so since its listing, for which the credit goes to its consistency in growth.
“The stock is expensive and it has been always throughout since its IPO. Important is to see its consistency and growth. Revenues have grown consistently, and Covid situation getting normalised, the topline is likely to grow further. Another 15-20 percent upside can be expected in next 6-9 months or prices touching Rs 5,000 levels by March 2022 is highly likely,” said Gupta.
Garg said in terms of the price-to-earnings multiple the stock may be overvalued, “but by looking at the continued growth in the revenue generation and the favourable economic conditions we can expect some more upside movement. In the next three to six months we expect the stock to test Rs 5,000 mark.”
Saraswat of Trustline Securities said the stock can hit Rs 5,000 or thereabouts in the short/mid-term time frame.
“In the latest quarter, the company has delivered a strong performance in Covid-19 pandemic and on top of that more recovery in sales is anticipated with gradually reducing lockdown in multiple states/cities. With increasing scale and scope of D-Mart, strong rebound in demand is expected, driven by same-store-sales-growth, network expansion and extending offerings on D-Mart Ready app coupled with high bill value on account of inflation are the triggers that could propel the stock to the territory of Rs 5,000 or thereabouts in short/mid-term time frame,” Saraswat reasoned.
For the longer term, he said with favourable demographics, increasing disposable incomes, and rapid urbanization are projected to drive the India growth story and may provide more legroom for the stock’s growth.
Technical View
On the technical front, “the stock’s RSI (relative strength index) was 90.895 which suggests that the stock is overbought zone (usually above 70 is considered overbought and below 30 as oversold) and is currently trading above its 50, 100, 200-day simple moving averages, which are 3688.73, 3410.66 and 3183.83, respectively,” said Garg.
He said that in the short term, these levels would serve as critical support zones and if the stock is trading above these levels, the immediate trend is upwards; if the price falls and trades below these level then, it suggests a bearish trend, Garg said
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