Trent vs Avenue Supermarts: Which retail stock should you pick this Diwali for long-term

With Diwali on our doorstep, demand for retailers has been rising. Two retail stocks Trent and Avenue Supermarts have been in focus recently on the back of recovering demand after almost 2 years this festive season. Let's take a look at which one of them is a better retail stock, hence a better investment.

Stock Price Trend

While Trent has surged nearly 30 percent in the last 1 year, Avenue Supermarts have fallen 8 percent.

In October so far, Trend has lost 0.5 percent, snapping gains from the last 3 consecutive months. Between July-September, the stock rose 32 percent. In the 10 months of 2022, the stock has given positive returns in 5 and negative in 5. It rose the most in July, up 18 percent, followed by in March, up 15 percent, whereas, it fell the most in May, down 8.5 percent followed by in June, down 4.5 percent.

Meanwhile, in the case of Avenue Supermarts, the stock lost 4 percent in October so far following a 3 percent decline in September. However, it rose nearly 7 percent and 25 percent in August and July, respectively. In the 10 months of 2022, the stock rose in 4 months while fell in the other 6. It gained the most in July followed by in August and it fell the most in June, down 14 percent followed by in January, down 12 percent.

In 2022 YTD, Trent advanced 33 percent while Avenue Supermarts fell 10 percent.

Company profile

Established in 1998 and part of the Tata group, Trent is headquartered in Mumbai but has pan-India operations. Trent is one of the leading players in the branded retail industry in India. It is engaged in the business of apparel, footwear, accessories, toys and games, among others. It operates through Westside, Landmark, Zudio, Utsa, Star Market and Booker Wholesale retail formats.

Avenue Supermarts owns and operates DMart stores. DMart is a supermarket chain that offers customers a range of products with a focus on the foods, non-foods fast-moving consumer goods (FMCG) and general merchandise and apparel product categories. Each DMart store stocks home utility products, including food, toiletries, beauty products, garments, kitchenware, bed and bath linen, home appliances and others. DMart operates approximately 284 stores and has a presence across Maharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh, Karnataka, Telangana and Chhattisgarh.

Earnings

In the September quarter, Avenue Supermarts reported a 64 percent rise in consolidated net profit of ₹685 crore as against ₹418 crore a year back. Sequentially, the profit is 6.6 percent higher from ₹642 crore in the June quarter this year.

Its consolidated revenue rose 36 percent to ₹10,638 crore for the quarter compared to ₹7,789 crore in the year-ago period. Sequentially, the revenue is higher by 6 percent from ₹10,038 crore. EBITDA margin for the quarter stood at 8.4 percent as compared to 8.6 percent in Q2FY22.

For the first half of FY23, consolidated revenue came in at ₹20,676 crore, as compared to ₹12,972 crore a year back. EBITDA margin stood at 9.2 percent as against 6.9 percent in the same period, the company said in an exchange filing.

"The FMCG and staples segment of the business has performed better than the general merchandise and apparel segments. Discretionary items in the non-FMCG segment while recovering have still not come back to pre-pandemic levels. The inflationary stress is more acute at lower price points in discretionary non-FMCG categories," Neville Noronha, CEO and Managing Director said.

Meanwhile, Trent has not yet reported its earnings for the September quarter. Analysts expect Trent to report a 3 percent YoY jump in its net profit at ₹95 crore while its EBITDA is likely to jump 31 percent YoY to ₹275 crore. The net revenue of the retailer is expected to surge 52.5 percent to ₹1,796 crore in the September quarter.

Which to pick this Diwali?

Neeraj Chadawar, Head - Quantitative Equity Research, Axis Securities has chosen Trent over Avenue Supermarts

"We continue to believe in the story of Trent, as retail demand returns to pre-pandemic levels: Consumer sentiments have improved with a gradual economic reopening, including offices, colleges, holidays, and marriages, among others. This is manifested in Trent’s operating performance in Q1FY23. The company reported ~39 percent revenue growth sequentially, the highest among peer retail players. Its fashion concepts registered the highest-ever quarterly sales in Q1FY23. We expect this momentum to continue in forthcoming quarters as well, especially when FY23 is likely to be free from Covid-induced restriction," Chadawar explained.

Sneha Poddar, AVP, Research Analyst, Broking and Distribution, Motilal Oswal Financial Services also agrees with Chadawar's pick.

Poddar also prefers Trent as it is witnessing strong footprint addition and healthy Like to Like (LTL) growth which has led to revenue surpassing pre-covid levels. On the other hand, footfall is still below pre-covid levels for Dmart and it is witnessing acute inflationary pressure in its non-food category, she added. Further, due to higher store size, it has not been able to cross pre-pandemic levels on a revenue per sqft basis, said Poddar.

Long-term pick?

Chadawar believes that for Trent, the return profile is improving across the segments. Further, reducing losses in Star Bazaar and improving traction in Inditex JV are also positive signs for the company.

"Over the last couple of years, Trent, with its Star food business has pursued the model of tight footprint stores, sharp pricing, and focus on fresh and own brand offerings. This model is resilient and exhibits strong economic viability. Moreover, Superior store metrics, supply chain optimization, diligent focus on cost rationalization, aggressive store expansion, higher contribution from private brands, and innovative offerings in value space would be key growth drivers in the long run," he pointed out.

Poddar also agrees.

"Yes even on a long-term basis, we prefer Trent as aggressive store addition, continued momentum in footprint additions and robust LTL growth across both Westside and Zudio will continue to drive growth. Dmart is likely to face the whammy of soft demand in the non-food category, prominence of new-age grocery models and their rich valuations," she explained.

Poddar expects a consolidated revenue/EBITDA CAGR of 46 percent/67 percent for Trent over FY22-24.

Retail Sector outlook

According to Chadawar, after witnessing two muted years that were impacted due to intermittent Covid-19 disruptions, the spirit of celebration is finally back to its pre-Covid levels.

This year, the excitement seems to have reinvigorated, and economic activities are picking up momentum, thanks to the large-scale vaccination drive undertaken by the government of India. This excitement is likely to be visible in the number of retailers, he noted.

Meanwhile, Poddar stated that India has strengthened its worldwide position and is emerging as a shining star in the global sky clouded with several macro headwinds.

"India being largely a domestic consumption-driven economy, seems to be on a better footing relative to the developed world which is grappling with high inflation-slow growth challenges. Thus we anticipate this to reflect in corporate earnings and expect the Nifty profitability to grow robustly at 16 percent CAGR over FY22-24," predicted Poddar.

From a mid to long-term perspective, she remains bullish on the India story and expects the positive trend to continue although intermittent volatility cannot be ruled out.

Investors can play the theme of credit growth and industrial capex, discretionary spending and travel and tourism from the next 1 year's perspective. Action is also expected in select niche segments like footwear, healthcare and quick service restaurants (QSR), she recommended.