Valuation hurdle stiff for DMart despite 26% correction since January

Store additions strong while same store sales declined in Q1

DMart (Avenue Supermarts), which was once the darling of the bourses, has underperformed the market in the recent past. Since January 2022, the stock has fallen 26 per cent while the Nifty has fallen 11 per cent.  DMart is down 41 per cent from its 52-week high of Rs 5,899 in October 2021.

However, the stock rebounded 3 per cent on Monday following its Q1, 2022-23 update. Morgan Stanley has an Overweight rating on the company, which it reiterated, because standalone Q1 revenue was up 95 per cent year-on-year, led by an increase in store count. Morgan Stanley has a target price of Rs 4,332, which translates to 23 per cent upside in the stock.

A more nuanced analysis from Motilal Oswal Research has a neutral stance and a target which is close to the current price. Motial Oswal Research estimates Like-to-like (Same store) revenues probably declined by around 13 per cent YoY. However store additions in the last 12 months amounted to 21, taking the total count to 294 stores.

In the last quarter 10 new stores were added. Apart from rising store count, the average store size has also increased 22 per cent in the last two years. In terms of revenue per square metre, sales are down. Brokerage estimates indicate that another 30 stores could be added by end-fiscal at an average of 10 new stores/ quarter. In fiscal 2021-22, the company added 50 new stores, with 38 stores added in the second half.

Revenue growth at Rs 9,807 crore is 70 per cent above pre-Covid levels (Rs 5,780 crore in Q1, 2019-20), and indicates a recovery given that Q1 2021-22 was at Rs 5,032 crore, and Q1, 2020-21 was at Rs 3,833 crore. The same-store reduction may be attributable to higher penetration of online shopping since the DMart store rollout is concentrated in Metros and Tier-1 cities. Prior guidance was that larger stores take longer to hit high revenues per square metre.  

After a long period of weak consumption, DMart may be one of several retail/ consumption related businesses that is seeing signs of investor interest. Other scrips such as Shoppers Stop, Sapphire Foods, Westlife Development and Trent have also seen some investment buying in the last week to 10 days.

There’s a lot of competition in this area, ranging from informal deliveries from the neighbourhood shops to platforms like Dunzo and Swiggy and Reliance Retail and Big Basket. If consumption is picking up, along with better discretionary purchases, competition is also picking up.

One factor that some analysts have noted was some insider selling in the last 12 months, while the stock was in doldrums. Insiders sold around Rs 90 crore worth of DMart stock in the last fiscal. However promoters hold just under 75 per cent and the market cap is over Rs 2.2 trillion.  There has also been some FPI buying the stock, apart from Morgan Stanley’s recommendations, by other FPIs.

Analysts see around 50 per cent revenue growth YoY in this fiscal and EBITDA could rise 65-70 per cent. The company is practically debt-free, which is a big plus in the regime of rising interest rates. Valuations remain very high with trailing price to earnings at 147 times and EV/ EBITDA at 88 times.