Rising disposable incomes, rapid urbanisation, technological advancements, increased brand awareness, and improved shopping experience are significant growth drivers of the retail industry.
Within this fast-paced industry, two players have captured the nation’s attention with consistent growth in revenue and profits.
While Avenue Supermarts (Dmart) is a price-conscious shopper’s paradise, the other, Trent, is a prestigious Tata group company redefining fashion and lifestyle.
Let’s compare the two companies on various parameters to see which is a better retailing stock.
Avenue Supermarts, which runs popular supermarket chain Dmart, focuses on value retailing and offers a wide range of products, including food, non-food (FMCG), general merchandise, and apparel.
It has a strong retail presence, around 365 stores across 10 states and union territories. The company’s total retail business area is around 15.15 million (m) square feet.
To keep up with the competition from e-retail, it is focussing on improving its e-business. It closed down two stores in Mumbai and converted them into e-fulfilment centres.
The company plans to further expand its store and e-commerce presence.
Part of the Tata group, Trent is engaged in the business of retailing food, grocery, non-food, apparel, footwear, accessories, toys, and games through format and concept stores.
The company operates over 875 stores across 170 cities for various brands such as Westside, Zudio, Utsa, Misbu, and Star.
Its total retail business area is around 11 million square feet, slightly lower than Avenue Supermarkets.
Apart from a strong retail presence, the company also has a growing online presence to cater to online customers.
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Between the two companies, Avenue Supermarkets has a higher market capitalisation as opposed to Trent.
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In terms of their performance on the stock market, Trent is leading with a return of 231% in the last year, whereas Avenue Supermarkets gave a return of 42.7%.
However, both the companies have managed to beat the market index Nifty 50, which gave a return of 25.82% in the last one year.
Both companies have their own brands as well as outside brands in their retail stores. However, the focus is on improving the portfolio of our own brands.
Avenue Supermarkets earns the majority of its revenue from offline stores. However, it is slowly increasing its online presence to stay competitive.
Within the offline store business, the food category contributes the maximum revenue, followed by the apparel and non-food segments.
In the last five years, its revenue has grown by a compound annual growth rate (CAGR) of 15.2% on account of strong merchandising and a compelling value proposition that increased that increase the store footfall, which in turn increased the revenue.
On the other hand, Trent earns maximum revenue from Zudio stores, followed by Westside.
In the last five years, its revenue grew at a CAGR of 29.1% on account of accelerated expansion of stores and strong brand connection with the loyal customer base.
Clearly, Trent is leading in terms of revenue growth.
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To measure the profitability of the company, we must look at the earnings before interest tax depreciation amortisation (EBITDA) and net profit.
The EBITDA of Avenue Supermarkets grew by a CAGR of 14.2%, and the net profit grew by a CAGR of 14.3% on account of steady store expansion, and economies of scale.
However, Trent’s EBITDA and net profit grew by a CAGR of 26.2% and 69.2% driven by higher sales of Zudio stores, and higher per-store revenue. Despite high profit growth, Trent’s Star stores, and joint ventures in the non-apparel format are loss making entities and are hampering the profit growth.
In terms of profit margins, Trent is again leading with an average EBITDA and net profit margin of 18.9% and 6.3%, against 9.5% and 5.7% of Avenue Supermarkets.
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Avenue Supermarkets is a debt-free company. Despite the company’s heavy investment in expanding its store network and improving its e-commerce game, it is able to maintain a debt-free status.
Healthy operating profitability and steady cash generation are the primary reasons why Avenue Supermarkets is able to remain debt-free.
Trent, on the other hand, has a debt-to-equity ratio of 0.1x, indicating it has very low debt on its books. Healthy profitability and steady cash generation are helping the company reduce its dependence on debt.
Trent is planning to invest in improving its store network across tier 2 and tier 3 cities. Avenue Supermarkets wants to diversify geographically by expanding its stores in east and north India as its business is concentrated in west and south India.
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To measure the financial efficiency, we must look at the company’s return on equity (RoE) and return on capital employed (RoCE).
Both ratios show how well the company is generating profits from equity capital and total capital invested. A high return is considered better.
The RoE of Avenue Supermarkets and Trent averaged at 12% and 9.9% respectively, whereas the RoCE averaged at 16.6% and 22.9% respectively over the last five years.
In terms of RoE, Avenue Supermarkets is leading, whereas Trent is leading in RoCE.
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Dividend is the profit a company distributes with its shareholders. A high and consistent dividend indicates the company is stable than its peers.
However, if a company isn’t paying dividends even after having high profits, it means the company prefers reinvesting the profits over paying dividends.
Avenue Supermarkets hasn’t paid any dividend to its shareholders as it is investing heavily in store expansion and prefers using internal funds over borrowed funds.
Trent, on the other hand, has paid consistent dividend to its shareholders over the last five years. Its dividend has grown at a CAGR of 26.2% over the last five years.
It’s dividend yield and dividend payout averaged at 0.1% and 67.4% respectively over the last three years.
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The actual worth of a company can be measured through its intrinsic value. If the company’s share price is higher than its intrinsic value, it is considered overvalued, otherwise it is undervalued.
While intrinsic value calculation can be complicated, we can look at the valuation ratios, which also help us estimate whether the company is overvalued or undervalued.
Two important valuation ratios are price to earnings (PE) ratio, and price to book value (PB) ratio.
The PE ratio of Avenue Supermarkets and Trent are 121.8x and 147.7x, whereas the PB ratio is 16.6x and 52x.
Clearly, Trent is overvalued when compared to Avenue Supermarkets.
When we compare them with their three-year average, then, Trent’s shares are undervalued, whereas Avenue Supermarket’s shares are overvalued.
If you compare the companies to their industry average, then both are overvalued when compared to their peers.
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In terms of revenue, profit growth, profit margins, financial efficiency, and dividends, Trent is leading against Avenue Supermarkets.
However, in terms of debt management, Avenue Supermarkets is leading against Trent.
The company has a strong presence in West and South India and now plans to expand to East and North India.
Apart from that, the company is also upping its e-commerce game to face the competition from its peers.
It also plans to increase its own brand products in the food category to increase its revenue and profit margins.
Trent, on the other hand, is investing heavily in Zudio and Westside stores. In the last five years, it has increased its store count by more than double.
It also plans to enter new categories and work on improving its loss-making businesses to ensure continuous growth in revenue and profitability.
Moreover, with the growing demand for apparel from its customers, it plans to launch several new labels under its portfolio to ensure wide variety in its stores.
Both the companies are well equipped to take on the growing demand through varied product offerings and increase their presence across the country.
It remains to be seen who will stay ahead in the profitability metrics.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
