DMart’s revival is good, but valuations aren’t cheap

There are several positive findings from Avenue’s Q2FY22 earnings. For example, its consolidated revenue grew nearly 47% on a year-on-year (YoY) basis and its standalone revenue ₹7,650 crore was 30% higher than the pre-pandemic level. Coming to same-store sales growth, the company has added 26 new stores in the last year, bringing the total store count to 246, with a retail business area of ​​9.44 million square feet.

Management highlighted that a total of 187 stores, which are two years or older, grew 23.7% year-on-year in the September quarter. It should be noted that despite a nearly 12% increase in stores, DMart’s other expenses increased a mere 3% in Q2, indicating significant cost control and operating leverage. So it’s no surprise that its Ebitda margin rose by more than 250 basis points (bps) to 8.8%. Ebitda means earnings before interest, tax, depreciation and amortization. One basis point is one hundredth of a percentage point.

What’s more, there is a relief as far as DMart’s gross margin performance is concerned. Gross margin on a sequential basis grew by 194bps and 25bps yoy to 14.3% in Q2. Investors believe that DMart’s gross margin has come down to an all-time low of 12.4% in the June quarter. Analysts say the continued recovery in general merchandising will further boost gross margins. Apart from this, the benefit of increase in FMCG (fast moving consumer goods) prices is yet to be reflected on the margins, said analysts.

In addition, the DMart ready e-commerce business also continued to expand. The business is now present in Mumbai, Pune, Ahmedabad, Bengaluru, Hyderabad, Surat and Vadodara. Going forward, investors will see the progress of Avenue’s e-commerce business, which now faces intense competition.

However, analysts note that DMart’s subsidiary earnings, which are considered a partial proxy for DMart Ready, rose 58% annually but fell 8% sequentially. Also, its losses increased sequentially in the second quarter of FY22. Nonetheless, this steady recovery is good.

However, the stock’s sharp rally over the past one year is said to have been mostly positive. With a return of around 170%, the stock has comfortably outperformed the benchmark index Nifty 50, which has gained 55% in the same period.

Second, at around 132 times the one-year forward price-to-earnings multiple, the stock’s valuation is by no means cheap. Hence, analysts are cautioning that the valuations have overtaken themselves.

Analysts at Edelweiss Securities Ltd note that the stock’s recent run-up and valuation of 92x on FY23 EV/Ebitda basis is without any fundamental change in business prospects. EV is short for Enterprise Value.

The Edelweiss report states, “The large opportunity in organized B&M grocery size has been taken into account, and a further re-rating is now dependent on significant progress in its online grocery operations or a move in stores, including None are visible yet.” .

Analysts at Kotak Institutional Equities believe that the expansion in DMart Ready’s footprint indicates that the business could contribute significantly higher revenues to DMart in future. “The company’s recent foray into smaller cities for its offline business has led to an increase in the number of medium-term stores,” Kotak analysts said in a report. While the domestic brokerage house has increased the fair value of the stock ₹3,080 as it incorporates higher growth for offline and separate pricing for DMart Ready, it cautioned that the stock is pricing in perfect execution and limited competition. Kotak has maintained its sell rating on this stock.

Meanwhile, shares of Avenue Supermarts witnessed sharp profit-booking in the second half of Monday’s trading session. ₹4,920, down about 7%.