DMart has done well in Q2 but its stock has gone through the roof
Premium- DMart’s gross margin recovered from its previous low and expanded by 194bps sequentially
- The DMart Ready business of Avenue Supermarts Ltd has now expanded to seven cities
PremiumThe Avenue Supermarts Ltd stock has been handsomely rewarded for its decent September quarter earnings. Improved mobility with limited restrictions than last year led to normalization of store operations and footfalls. Shares of the company, which runs retail grocery chain DMart, rose more than 8% intraday on the NSE on Monday, hitting a fresh 52-week high of ₹5,900, before paring the gains.
There are many positive takeaways from Avenue’s Q2FY22 earnings. For instance, its consolidated revenue grew around 47% on a year-on-year (y-o-y) basis and its standalone revenue at ₹7,650 crore was 30% higher than pre-pandemic levels. As for same-store sales growth, the company has added 26 new stores in the past year, taking the total store count to 246 with a retail business area of 9.44 million square feet.
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The management highlighted that a total of 187 stores, which are two years or older, grew by 23.7% y-o-y in the September quarter. It should be noted that despite a nearly 12% y-o-y increase in stores, DMart’s other expenses grew by a mere 3% y-o-y in Q2, thereby indicating significant cost control and operating leverage. Little wonder then that its Ebitda margin rose more than 250 basis points (bps) y-o-y to 8.8%. Ebitda stands for earnings before interest, taxes, depreciation and amortization. One basis point is one-hundredth of a percentage point.
What’s more, there is a respite as far as DMart’s gross margin performance is concerned. Gross margin expanded by 194bps on a sequential basis and 25bps y-o-y to 14.3% in Q2. Investors would reckon that in the June quarter, DMart’s gross margin fell to its lowest-ever of 12.4%. Analysts say the ongoing recovery in general merchandising would give gross margins a further boost. Also, the benefit of rising FMCG (fast-moving consumer goods) prices is yet to reflect in the margins, the analysts said.
Further, the DMart Ready e-commerce business also continued to expand. This business is now present in Mumbai, Pune, Ahmedabad, Bengaluru, Hyderabad, Surat and Vadodara. Going ahead, investors will watch the progress on Avenue’s e-commerce business, where there is intense competition now.
However, analysts note that DMart’s subsidiary revenues, which are considered as a partial proxy for DMart Ready, rose 58% y-o-y 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 in the past one year is said to have priced in most of the positives. With returns of around 170%, the stock has comfortably beaten benchmark index Nifty 50, which has rallied by 55% in the same duration.
Secondly, at a one-year forward price-to-earnings multiple of around 132 times, the stock’s valuation is not cheap by any means. Analysts, therefore, caution that valuations seem to have run ahead of themselves.
Analysts at Edelweiss Securities Ltd note that the stock’s recent run-up and valuation of 92 times FY23 EV/Ebitda basis have happened without any fundamental change in business prospects. EV is short for enterprise value.
“The massive opportunity in organized B&M grocery size is factored in, and a further re-rating is now dependent on significant strides in its online grocery operations or a step up in store addition, neither of which is yet visible," the Edelweiss report said.
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Analysts at Kotak Institutional Equities are of the view that the expansion in DMart Ready’s footprint indicate that this business can contribute significantly higher revenues to DMart in the future. “The company’s recent foray into smaller cities for its offline business drives higher medium-term store count," analysts at Kotak said in a report. While the domestic brokerage house has raised the stock’s fair value to ₹3,080 as it incorporates higher growth for offline and separate value for DMart Ready, it cautioned that the stock is pricing in perfect execution and limited competition. Kotak has kept its sell rating on this stock.
Meanwhile, shares of Avenue Supermarts saw sharp profit-booking in the second half of Monday’s trading session, ending the day at ₹4,920, down around 7%.
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