Analysts bearish on Avenue Supermarts post weak Q3 result; see 32% downside

Moderation in growth trajectory going ahead, owing to Covid-related disruptions, along with extremely stretched valuations, cap near-term upside in the stock price

Shares of RK Damani-owned Avenue Supermarts, operator of D-Mart chain of stores, slipped in trade on Monday as subdued growth in December quarter (Q3FY22), despite being a normal period from Covid perspective, soured sentiment.

The company reported 24.6 per cent rise in standalone net profit at Rs 586 crore for the quarter ending December 31, 2021, compared with standalone net profit of Rs 470 crore a year ago. The revenue, meanwhile, stood at Rs 9,065 crore, up 22 per cent from Rs 7,432.7 crore a year ago.

Further, the company registered a 25.6 per cent year-on-year growth in EBITDA at Rs 868 crore, and reported an EBITDA margin at 9.6 per cent for the quarter, up 30 bps YoY.  

Reacting to the results, the stock of the consumer goods' company fell nearly 2 per cent to Rs 4,640 apiece in the intra-day trade, as against a per cent rise in the benchmark S&P BSE Sensex.

Consensus view among analysts point at moderation in growth trajectory going ahead, owing to Covid-related disruptions. Besides, extremely stretched valuations could cap near-term upside in the stock price, they say.

"DMart's Q3 revenue performance was underwhelming despite near-normal operating conditions plus significant commodity inflation. Gross margin print of 14.9 per cent was dismal. Extremely expensive valuations limit our willingness (and ability) to have a constructive view," said a note by ICICI Securities.

That said, DMart's strategy to sharpen its product mix, enabling it to sustain lower costs, increased pace of store additions, fast turnaround of e-commerce operations (DMart Ready), and lower-than-expected competitive intensity, keeps its long-term outlook intact, believe analysts.

Here's how brokerage view DMart:

JP Morgan | Underweight | Target price: Rs 3,955

Rising Omicron incidence in large cities poses near-term risk to store footfalls/product mix, and hence revenue offtake. That said, the scale-up of DMart Ready should help arrest sales’ decline.

Credit Suisse | Underperform | TP: Rs 3,600

Q3FY22 had an underwhelming revenue growth, especially in the context of large retail space expansion. The brokerage maintains an ‘underperform’ stance due to extremely stretched valuations, and potential moderation in growth rate from online grocery.

UBS | Sell | TP: Rs 3,500

The analysts have a bearish view on the stock given near-term headwinds, and tepid growth outlook due to store disruptions, and raw material inflation, which is likely to impact performance.

Morgan Stanley | Equal Weight (from Underweight) | TP: Rs 4,338

The global brokerage has upgraded the stock on the back of Dmart's impressive margin delivery despite deteriorating product mix, better-than-expected Q3 performance, improving business fundamentals, and trailing stock underperformance.

ICICI Securities | Sell | TP: Rs 3,900

Demand for general merchandise and apparel business has still not recovered, and inflation and lesser opportunities to go out are impacting certain categories more than others.

The brokerage has cut their earnings estimate for FY22E / FY23E by around 9 per cent / 1 per cent respectively. Besides, it now models revenue / EBITDA / PAT CAGR of 32 per cent / 43 per cent / 44 per cent over FY21-24E.

Motilal Oswal Financial Services | Neutral | TP: Rs 4,500

Given DMart's in-line Q3 performance, the brokerage expects DMart to deliver an FY22E–24E revenue/PAT CAGR of 38 per cent/46 per cent, factoring in an 18 per cent footprint addition.

"However, online retail market size has increased nearly 3–4x to Rs 40,000 crore, led by a significant change in the business model, the presence of deep-pocketed players (such as Amazon and Reliance Retail), and the overlapping of local markets. These factors have made us cautious considering DMART continues to focus on the brick-and-mortar model," the brokerage opined.

The stock is trading at rich valuations of 72x/115x EV-to-EBITDA / P/E on FY23E, tracing the earnings growth trajectory.

Kotak Institutional Equities | Sell | TP: Rs 3,200

The brokerage has revised down FY22 revenue and EBITDA estimates by 1 per cent and 3 per cent, respectively to bake in the impact of Covid-related disruptions in Q4FY22. It, however, has retained FY23-24 estimates.

Edelweiss Securities | Reduce | TP: Rs 3,966

Purchase of real estate at favourable rates and hence the store expansion. This arrangement entails huge initial cash outflow, which may involve taking higher debt.

In the scenario where new stores fail to pick up as anticipated, then incremental debt taken for the same would need to be serviced from cash flows of other stores, which could impact overall profitability of business.

Besides, revenue concentration (largely from Western India – Maharashtra and Gujarat), and competition from e-commerce companies are other key risks.

Prabhudas Lilladher | Accumulate | TP: Rs 5,345

We are increasing store openings in FY22 to 40 (35 earlier) even as we factor in slight moderation in margins even as high inflation will give some sourcing benefits to D-Mart.

"We believe bill cuts/store/day will normalize over FY23 and bill value will get a flip from higher inflation. We estimate 31 per cent PAT CAGR over FY20-24 (48.3 per cent over FY22-24) and remain positive for the long term," the brokerage said.

Source: Brokerage Reports