Stock of Avenue Supermarts Ltd., which runs the DMart chain of retail stores, has seen a remarkable rebound in recent months, rising 23% since the company announced its March quarter results (Q4FY22) in May. It helped that the shares had seen a sharp correction from the high before the Q4 numbers.
As such, investors tend to account for a fair share of optimism on the growth prospects. Currently, the shares are down more than 30% from their 52-week high 5,900 each was seen on 18 October. Still, valuations don’t provide much relief. Analysts said valuations have peaked, but are still above the pre-Covid average. Bloomberg data shows the stock is now trading at 78 times FY24 estimated earnings, which is quite high.
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However, the recovery in the company’s business has been steady, with disruptions due to the easing of the Covid pandemic. Q4 saw an adverse impact of the Omicron Covid wave, but no Covid-related disruptions in the June quarter results (Q1FY23) announced on Saturday.
Q1 results have outpaced estimates on profitability. Standalone Earnings Before Interest, Taxes, Depreciation and Amortization (Ebitda) 1,008 crores, which is about 356% y-o-y (YoY) growth. However, this growth is on a favorable basis as the first quarter of last year was affected by the second wave of COVID-19.
Jefferies India analysts said, “Q1FY23 EBITDA beat our and consensus estimates (by 8% and 15%, respectively) on better gross margins, which were at 12-quarter highs, pushing EBITDA margins to nearly record highs. But pushed.” Report on 10 July. Sequentially, EBITDA margin increased 166 basis points to 10.3%.
However, some parameters are not showing substantial improvement. The revenue performance has not been up to the mark. “On a per-store basis, revenue grew by 59%, but the CAGR over the three-year period is just 2%, which was seen in the last two quarters,” said analysts at JM Financial Institutional. Securities Ltd. CAGR is the compound annual growth rate. The broking firm believes that DMart’s approximately 16% gross margin and >10% operating margin gives the business the flexibility to intensify its value propositions. “If history is any guide, we expect DMart to manage to channel its ‘extra’ margin for higher growth,” analysts at JM said in a report on July 9.
DMart’s discretionary contribution mix in Q1FY23 has not yet reached pre-pandemic levels. Traction in DMart’s general merchandise and apparel categories was better sequentially, but is still somewhat more impacted by the disruption and sharp inflation impact led by the Covid-19. “High inflation over the past two years largely hides a potential strain in volume growth for the discretionary categories of consumption,” the company said.
In addition, the expansion of the store can lead to an increase in revenue. “For retail companies, we expect revenue growth to be faster than growth in retail. In case of DMart, Q1FY23 retail expansion was 24% three-year CAGR compared to 19% revenue growth,” said IDBI Capital Varun Singh, an analyst at Markets & Securities, said.
DMart has opened 110 stores in the last three financial years. However, due to the pandemic and various restrictions, these stores have not been able to operate under normal conditions in the last two years. According to Singh, “the performance of these newly opened stores will be a key indicator.” New stores performed well in the first quarter.
As normalization picks up pace, store additions can be expected to benefit. All told, rapid revenue growth will go a long way in improving sentiments for the stock. However, in the short term, rich valuations could prevent a major uptrend.