Why stocks like Avenue Supermart and Bajaj Finance are risky at this point in time?

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Avenue Supermart

Avenue Supermart (popularly known as DMART) has seen a stellar run since its IPO in May 2017. It has yielded exceptional returns of nearly 5.5x for its investors. There are no two ways about the company’s financial performance, which has been remarkable over FY15-19. Its Sales/EBITDA/PAT grew at a CAGR of 32.6%/37.9%/45.1%. Further, increasing its geographical presence (176 stores in FY19 v/s 89 in FY15) has only added to its financial performance. However, given the recent sharp run-up in the stock, the valuations have scaled way high making it one of the most expensive stocks in Indian markets. The stock currently trades at a whopping ~120 times FY19 earnings.

But are the valuation justified?

Well, certain aspects do work in favour of the company. It includes strong industry growth led by increase in domestic consumption, rising disposable income, lifestyle changes by the affluent middle class. Further, the organized retail penetration is way lower as compared to other developed/developing countries, which gives immense scope for organized players to capitalize on this opportunity. GST implementation and corporate tax cut (Avenue pays full tax) also provide impetus to robust growth for the company.

However, there are a number of concerns that the market participants are currently ignoring. Firstly, as much as the industry is a sunrise sector in India, the competitive intensity is fierce in a price-sensitive market like India. The company not only faces stiff competition from domestic players like Future Retail, Trent, Shoppers Stop etc. but also global giants like Walmart and Amazon. Inevitably, the competitive intensity would only increase from here on and would put pressure on the margins.

Secondly, the current valuations are definitely not justified as any decline in growth or margin pressure could cause sharp correction (over 30%). The recently approved share issuance could also act as an overhang as it would dilute the EPS of the company. So should one sell the stock? The answer would be no. The prudent approach would be to ride the story until the numbers disappoint for at least two quarters. However, investors looking to invest at CMP should stay alert and keep a strict stop loss.

Bajaj Finance

The story of Bajaj Finance is even more intriguing if you take a longer time horizon. The stock has given mammoth returns of nearly 15x in the last five years. Yes, it’s true, an investment of Rs. 1 lakh in Bajaj Finance in 2014 (October) is equal to Rs. 15 lakhs today. The NBFC sector, on the other hand, has had a volatile ride in the last five years witnessing robust growth in the first three and later struggled due to tight liquidity conditions and economic slowdown. However, Bajaj Finance withered the storm with ease as it continues to grow at an astounding pace taking its AUM CAGR of 32% and profit growth of 44%over FY15-19. Despite such aggressive growth, the company maintains one of the highest asset quality in the industry.

But the real question remains, will this continue?

Well, probably not. Firstly, in the on-going overall slowdown wherein most NBFCs are finding it difficult to grow, it is only going to invite more competition for Bajaj Finance. Further, not only NBFCs but retail facing banks like HDFC Bank and Kotak Mahindra bank could also venture into this space thereby increasing the competition. Secondly, the overall NBFC space has witnessed sharp valuation correction in the last one year, however, Bajaj Finance trades at a considerable premium to its direct counterparts. This is largely due to its robust growth and healthy asset quality. In fact, valuation wise Bajaj Finance is more expensive than HDFC Bank if we compare both the company’s P/B value.

Hence, again for Bajaj Finance, we would not recommend selling, rather the investor should ride the story until the company delivers. However, one should look to exit when the company has disappointed in at least two quarterly results. 

Please note: We are not recommending to sell the stock, but fresh investors should stay cautious.

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This Post Has One Comment

  1. RD2467

    all articles…short and up to date reviews! keep it up.

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