Kotak Institutional Equities (Kotak Securities) in its new report has shown faith in the stock of Reliance Industries (RIL) with a target price of ₹2,980, believing that the company's foray into the FMCG business will augur well for the oil-to-telecom-to-retail giant.
In its Annual General Meeting (AGM) held on August 29, 2022, Reliance Retail (RR) announced its foray into the FMCG business, by developing and delivering high-quality products at affordable pricing.
Kotak said its channel checks in Mumbai indicate that RR has begun appointing super-stockists to distribute its private label products in multiple FMCG categories.
"RR already has a wide range of private labels across several entry-level foods and non-food FMCG categories and will likely acquire more brands. We believe own FMCG sales can add a margin layer to the overall Jiomart business," said Kotak Securities.
"We think this move is logical given RR already has a private label portfolio of food (pulses, packaged foods and beverages) and non-food FMCG (home, hygiene and personal care) brands that it has developed over a course of time to serve its widespread own store footprint of nearly 1,713 stores (Fresh + Smart stores as of March 31, 2022)," said Kotak.
Kotak expects RR to leverage Jiomart’s distribution strength to drive FMCG sales.
Jiomart has stepped up merchant partnerships and has onboarded 20 lakh merchants. With Jiomart having built up significant reach, Kotak believes RR will also use this network to retail its own products.
It started with entry-level products across food and non-food FMCG categories. Its strategy seems to be to price its own products a notch lower than the corresponding FMCG brand in order to drive shelf space gain, said Kotak.
Kotak highlighted that among RR’s new commerce businesses, the B2B (business-to-business) model is well understood though the B2C (business-to-consumer) model is undergoing iterations.
"As we understand, both these businesses are low-margin today due to structural reasons and high competitive intensity. FMCG businesses can add a margin layer over these existing businesses, making RR’s investment in B2B more worthwhile. Assuming RR begins distributing its products to 100,000 Kirana initially, it can garner FMCG sales to the tune of ₹2-5 billion within one-two year of launch," said the brokerage firm.
Kotak said Reliance Retail already has a large private label portfolio across categories. These brands have been hitherto available on RIL’s own sales channels (own stores, websites, etc.) but should now be available at third-party Kirana and stores as well. RIL’s FY2022 Annual Report mentions that RR had a 15% share of its own brands in the hand wash and hygiene category (under Puric brand) in its stores/websites.
Shares of RIL hit their all-time high of ₹2,855 on April 29, 2022. At present, the stock is at ₹2529.80 on BSE.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.