DMart’s relaunch is good, but valuation is not cheap

Avenue Supermarts Ltd shares were generously rewarded for their good results in the September quarter. Improved mobility with limited restrictions compared to last year has led to the normalization of store operations and footfall. Shares of the company, which runs the retail grocery chain DMart, rose more than 8% intraday on the NSE on Monday, hitting a new 52-week high of ??5,900, before reducing the gains.

Avenue’s benefits at T2FY22 are numerous and positive. For example, its consolidated revenue increased by approximately 47% year-on-year and its autonomous revenue to ??7,650 crore was 30% higher than pre-pandemic levels. In terms of comparable store sales growth, the company added 26 new stores in the past year, bringing the total number of stores to 246 with retail area of ​​9.44 million square feet.

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Expanding footprint

Management pointed out that a total of 187 stores, which are two years or older, grew 23.7% year-over-year in the September quarter. It should be noted that despite an almost 12% year-on-year increase in stores, DMart’s other expenses only increased by 3% year-on-year in the second quarter, indicating cost containment and leverage. significant operations. No wonder then that its EBITDA margin increased by more than 250 basis points (bps) year-on-year to 8.8%. EBITDA represents earnings before interest, taxes, depreciation and amortization. A basis point is one hundredth of a percentage point.

Additionally, there is a breathing space when it comes to DMart’s gross margin performance. Gross margin increased 194 basis points on a sequential basis and 25 basis points year-on-year to 14.3% in the second quarter. Investors would expect DMart’s gross margin in the June quarter to have fallen to its lowest level of 12.4%. Analysts believe that the ongoing upturn in general merchandising would boost gross margins. In addition, the benefits of higher prices for consumer goods (fast moving consumer goods) are not yet reflected in margins, analysts said.

In addition, the DMart Ready e-commerce business also continued to expand. This company is now present in Mumbai, Pune, Ahmedabad, Bengaluru, Hyderabad, Surat and Vadodara. Going forward, investors will observe the progress of Avenue’s e-commerce business, where competition is now intense.

However, analysts note that the revenues of DMart subsidiaries, which are considered a partial approximation of DMart Ready, increased 58% year-on-year but fell 8% sequentially. In addition, its losses increased sequentially in the second quarter of FY22. Nonetheless, this steady recovery is good.

However, the strong rally in the stock over the past year would have incorporated most of the positives. With returns of around 170%, the stock comfortably beat the benchmark Nifty 50, which rose 55% over the same span.

Second, with a one-year futures price / earnings multiple of around 132 times, the stock’s valuation is by no means cheap. Analysts are therefore warning that valuations appear to have taken the lead.

Analysts at Edelweiss Securities Ltd note that the stock’s recent rally and valuation to 92 times the FY 23 EV / Ebitda base occurred without any fundamental change in the business outlook. EV is the abbreviation for enterprise value.

“The huge opportunity of organized B&M grocery size is being taken into account, and further assessment is now dependent on significant advancements in its online grocery operations or an increase in in-store additions, which do not ‘is not yet visible, “said the Edelweiss report. .

Analysts at Kotak Institutional Equities believe that the expansion of DMart Ready’s footprint indicates that this company may generate significantly higher revenues for DMart in the future. “The company’s recent foray into smaller towns for its offline business is driving more stores in the medium term,” Kotak analysts said in a report. As the national brokerage firm increased the share’s fair value to ??3,080 because it incorporates higher growth for offline and separate value for DMart Ready, he warned that the share price was perfectly executed and competition was limited. Kotak has maintained its sell rating on this stock.

Meanwhile, Avenue Supermarts shares posted strong profits in the second half of Monday’s trading session, ending the day at ??4,920, down about 7%.

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Lee J. Murillo

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