Avenue Supermarts Ltd stock rose nearly 7% in opening deals on the National Stock Exchange on Monday, partially reversing losses seen last week when the stock was down nearly 12%. In fact, the company’s shares that drive dmart The chain of retail outlets is now far from the very high standard they have been enjoying for some time. After all, the stock has fallen as much as 40% from its 52-week high. On October 18, Rs 5,900 was seen on the NSE.
The comparatively low valuation has prompted some analysts to raise their ratings. For example, ICICI Securities Ltd has changed its recommendation on DMart stock from sell to buy. In a note dated May 15, the broking firm said, “A broad-based market correction (and possibly some technical factors) brings rationality to buy at any given price.” “In FY 22-24E, we believe there are price and volume tailwinds in: inflation (higher absolute gross profit per unit, operating leverage) and potentially higher footfalls because of higher numbers,” the report said. Consumers prioritize price.”
Further, JM Financial Institutional Securities Ltd. has upgraded its rating on DMart from hold to buy “after two years to take advantage of the recent sharp correction”.
Be that as it may, a potential increase in competitive intensity will hurt. Also, investors should keep an eye on the pace of recovery in sales once normalcy returns. DMart’s March quarter results (Q4FY22), announced on Saturday, show that the Omicron wave affected the sales momentum in mid-January. In the past, it has taken 40-50 days for restrictions to be lifted or for concerns about a Covid wave to subside. In such a situation, there was a good recovery in DMart in March.
Overall, standalone revenue grew 17.8% year-over-year in Q4 8,606 crore. DMart’s gross margin fell 5 basis points to 14.3%. One basis point is 0.01%. However, EBITDA (earnings before interest, taxes, depreciation and amortization) margin rose 18 basis points to 8.6%, helped by efficient cost control.
However, revenue per store was slightly lower. As analysts at JM Financial point out, “Average revenue per store for the March quarter grew at just 2% CAGR over the uninterrupted pre-pandemic level of the March 2019 quarter. Before the pandemic DMart had grown per-store revenue on average (FY17-20) by 8.8% per annum on average.” CAGR is the compound annual growth rate.
Going forward, the pace of growth in the discretionary segment needs to be monitored. According to DMart, “In the discretionary non-FMCG segment, as of now it is difficult to predict whether the relative lower growth is due to ecommerce shift or because of a secular change over time due to inflation or due to significantly higher COVID related negatives. Economic impact for some shopkeepers. We will be able to give that qualitative explanation only if there are no more Covid shutdowns/restrictions in at least two more quarters.”
For DMart, in FY22, the share of revenue from food items, non-food items (FMCG), and general goods and apparel stood at 56.86%, 19.74%, and 23.40%, respectively. The company opened 50 new stores in the last fiscal, taking the total number to 284.
Going forward, it goes without saying that further reduction of potential COVID waves will help accelerate sales. Additionally, DMart’s e-commerce business has gradually expanded over time and is now present in 12 cities. That said, a slower than expected e-commerce will be a risk for DMart stock as competitive intensity increases. Bloomberg data shows the stock is now trading at around 68 times FY24 estimated earnings.