Avenue Sumermarts, which operates DMart retail store chain, is confident that its lower price model for everyday household items will find favour despite rising competition from offline and online retailers. In a recent analyst meeting, the retailer acknowledged that it needs to accelerate the pace of store expansion and keep the input costs down to maintain double-digit same-store sales growth (SSSG).

Brokerage PhillipCapital said the management seemed unperturbed about the rising competition "because of a massive opportunity landscape, Dmart’s cluster-based approach of store expansion, and its razor-sharp focus on providing ‘Everyday Lower’ prices to the customer."

Store expansion and SSSG

The company said the store expansion was slower than expected last year due to a delay in regulatory permissions for the stores. DMart added 21 stores in the fiscal year 2018-19 as against 24 stores in the previous fiscal. The company said it is committed to expediting store expansion in a meaningful way in the FY20.

Motilal Oswal expects the company to add 24 stores in the FY20. DMart is also open to lease-based stores, which could help it to reduce costs, added Motilal Oswal

Kotak Securities pointed out that store expansion in the FY20 will increase expenses as land costs are certainly higher-than DMart’s historical land costs. However, the brokerage said the addition of new stores will support SSSG as generally, DMart's new stores have much higher SSSG than old ones.

DMart Ready

Avenue Supermarts currently operates DMart Ready in Mumbai, with 196 stores with an average store size of 200-300 sq. ft. The company treats it as a pilot project and is not in a hurry to expand quickly until customers are comfortable to pay for the delivery cost, noted Motilal Oswal.

DMart managed to control losses of this segment in FY2019 and is now looking at this as an alternate channel, said Kotak Securities. "Whatever is good for a customer will do, however not a hard discounter and hence cost of delivery needs to be optimized more," added the brokerage.

No loyalty programmes or mobile wallets

Avenue Supermarts is not looking to introduce any loyalty programmes or tie up with any digital wallets as management believes DMart customers are value-focused and the company would rather focus on keeping product prices low, noted Kotak Securities. Dmart may, in future, offer their own wallet, but only if they can offer some value add to the customer, the brokerage said.

Motilal Oswal said the company hinted that it is working on the cash and

carry business.

Analysts outlook on the stock

Motilal Oswal maintained 'sell' on the stock, saying "the lower growth expectation is not fully captured in the rich valuation." The brokerage slashed the target price to Rs 1,115 per share form Rs 1,125.

"As the pace of PAT growth slowed to 12 percent in FY19 on the back of price-led margin pressure, the stock has corrected by 16 percent over the past year. Despite this, it is still richly valued at EV/EBITDA and P/E of 31x and 56x, respectively, on FY21E basis," it added.

Kotak Securities also kept the rating at 'sell' as the brokerage said the rich valuation keeps them cautious. The target price is Rs 1,311 per share.

Jefferies rated the stock 'underperform' with a target price of Rs 1,230 per share. The brokerage said rich valuations and rising competitive intensity make risk-reward unattractive.