Why Avenue Supermarts Stock is falling?

3 min read
Avenue Supermarts has corrected ~10% in last 15 days. What are the reasons for recent fall in stock price of Avenue Supermart?

Reasons behind recent fall in stock price of Avenue Supermarts

Introduction

In the past 15 days, Avenue Supermarts stock price has plummeted almost 10% from INR 2200 to INR 1970. In this blog, we will see the reasons for the recent stock price fall in Avenue Supermarts.

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Why Avenue Supermarts is falling?

1. Fully Mature Store closure in Aug’20 at Mira Road

  • Avenue Supermarts closed a fully mature store located at Mira Road in Aug’20 and converted it into a dark store, which can be further used as local fulfillment center, from where E-Commerce deliveries can be fulfilled.
  • This is for the first time since Avenue Supermart’s IPO that any store is closed.
  • The reason behind company’s strategy to turn a fully operational store into dark center is still unknown.
  • This has created a room of consciousness and uncertainty among institutional investors about company’s changing strategy.

2. High PE

  • Current PE of Avenue Supermarts is 126 x, based on TTM earnings.
  • This does not seems to be a sustainable valuation for growth.
  • There is a possibility of sluggishness in the earnings for short term (1-2 quarters) because of the pandemic which led to drastic reduction in footfalls.

3. PE Re rating

  • Some of the common examples of PE Re rating in recent past are Page Industries, HDFC AMC, etc where the PE multiple corrected by almost half.
  • Earlier there was unavailability of a strong competitor/ peer for Avenue Supermarts. However now a days, with the emergence of Reliance Retail the competition landscape in retailing has changed.
  • Investors these days consider Reliance Industries more of a Telecom (Jio) and Retail company than Oil marketing company.
  • This can be a reason for company’s re-rating.

4. Increasing competition from offline retail stores

  • Company is also facing stiff competition from offline retail stores like Reliance Retail, Tata Consumer, etc.
  • Earlier, Avenue Supermarts had strong pricing power which gave it an edge over the retail players like big bazaar.
  • But now-a-days, Reliance Retail (reliance Fresh) is trying to erode this pricing power and operate at similar prices.
  • Tata Consumer Products being sold at its retail outlets like Star Bazaar can also be one of the potential competitors for the company.

5. Increasing competition from E-Retail

  • Currently, Amazon Pantry and Jio-Mart are major players in the Indian E-retail space.
  • Increasing pricing competitiveness of these players and preference to E-commerce especially during these times of pandemic will favor E-retailers.
  • Amazon Pantry and Jio-Mart already have deep pockets and it will be tough for a new comer like Avenue Supermart’s to overcome this moat.

6. Lock-down Impact on Earnings

  • As said before, impact of lock-down will be seen on company’s revenues for next 1-2 quarters.
  • There is a risk of change in consumer behavior and its prolonged impact will affect Avenue Supermart which is based on brick & mortar business strategy.

7. Availability of increased free float market capitalization

  • Promoter of Avenue Supermart, Mr Radhakrishna Damani, has reduced the holding to 75% in line with the SEBI Norms.
  • This has resulted in availability of more free float capital for public to trade, thus increasing the supply of shares as compared to demand.
  • Recently Mr Damani has also invested in other businesses might signal promoter’s deviation from the core business of retailing.

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