Why Avenue Supermarts Stock is falling?

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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.
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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.
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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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