Mumbai: Shares of Avenue Supermarts Ltd jumped more than 18% on Tuesday, after Goldman Sachs initiated coverage on the parent company of D-mart with a buy rating and set a target price which was 54% higher than Monday’s close.
In reaction, Avenue Supermart shares soared as much as 18.28% to Rs. 1217 on the BSE, its highest ever, in high volume trade. At 1.53, the stock was trading 16.87% up at Rs1202.40, while the Sensex was down 19 points, or 0.06%, at 31,607.
“Avenue Supermarts is well placed to benefit from tax reforms as grocery market share shifts to the organized sector,” Goldman Sachs analysts Aditya Soman and Aditya Gupta said in a note on Tuesday, while setting a 12-month target price of Rs1,586 for the stock.
Goldman Sachs analysts argued that while Avenue Supermarts maintains low prices, with thin gross margins and light working capital, its cash return on capital invested (CROCI) remains better than its global retail peers’.
According to them, the country’s most-profitable retailer is set to grow its EBIT (earnings before interest and taxes) by 13 times in 10 years, aided by this high growth, low margin and high return strategy.
They agreed that Avenue Supermarts’ valuation appears stretched on a 12-month horizon, with a fiscal year 2019 price to earnings (P/E) ratio of 66 times as compared with the brokerage firm’s sector average of 40 times.
“However, we believe AVEU (Avenue Supermarts) can grow EPS (earnings per share) at 30% for the next 10-years, so we believe making a decision on near-term earnings could result in missing a long-term compounding opportunity,” they said.
The biggest risk to their estimates is higher-than-expected competition from e-commerce, especially in winning over the large urban mass cohort, they added.