Analysts see up to 40% downside in Damani's Avenue Supermarts; here's why

Expensive valuations, risk of a moderation in growth, and the presence of deep pocket players like Amazon and Reliance Retail restricts the near-term upside

Near-term margin concerns and lingering Covid-19 threat have turned analysts cautious on Avenue Supermarts, the owner of DMart chain of retail stores, who see up to 41 per cent downside in the company's stock price. Shares of the company declined 2 per cent to Rs 3,312 on the BSE in the intra-day trade on Monday as most brokerages retained either 'sell', 'reduce' or 'underweight' rating on the stock due to expensive valuation. 

"The stock is trading at rich valuations (55.3x FY23E EV/EBIDA and 87.4x FY23E P/E). Expensive valuations, risk of a moderation in growth, owing to strong traction for online retailers in a post-Covid world; and the presence of deep pocket players like Amazon and Reliance Retail restricts the near-term upside," said a report by Motilal Oswal Financial Services. The brokerage values DMART at 52x FY23E EV/EBITDA (which is around its average multiple of ~57x) and has retained a 'Neutral' rating on the stock with a target price of Rs 3,220.

Kotak Institutional Equities, meanwhile, has a 'Sell' call on the stock with a target price of Rs 2,000 while Dolat Capital maintained a 'Reduce' call with a target price of Rs 3,218. Among global brokerages Citi and Morgan Stanley maintained their 'Sell' rating on the stock with target prices of Rs 2,210 and Rs 3,268, respectively. 

  

Near-term outlook challenging

The company's bottomline improved significantly during June quarter of the current fiscal (Q1FY22), courtesy low base of the previous fiscal (Q1FY21), yet its performance missed Street expectations due to extended localised lockdowns in April and May.

Avenue Supermarts' standalone net profit stood at Rs 115 crore during the quarter, registering a growth of 132 per cent over previous year's PAT of Rs 50 crore. Yet the number was over 40 per cent short of analysts' expectations. Total revenue also rose 31 per cent to Rs 5,032 crore as against Rs 3,833 crore in June 2020, but was down about 5 per cent from Street expectations. 

Operationally, earnings before interest, tax, depreciation and amortization (Ebitda) in Q1FY22 stood at Rs 221 crore, up from Rs 109 crore clocked in the corresponding quarter of last year. It was, however, 26 per cent below analysts' estimates and 62 per cent below pre-Covid levels. Gross margin, meanwhile, declined by 129bps YoY but was off-set by lower other expenses (down 236bps YoY) leading to 156bps Ebitda margin growth on a yearly basis.

The pressure on margins, Gaurav Uttarani and Suvarna Joshi, research analysts at Axis Securities, believe will continue in the near-term as sales and sales mix remain inclined towards groceries and FMCG products. "With restricted operating hours and weekend closure in certain cities with inconsistent supplies of non-FMCG products, the company's new-term outlook remains challenging," they said in a report dated July 12.

Dmart sales mix saw a shift in favour of F&G and FMCG in Q1FY22 whereas sales from general merchandise and apparels were lower. This, analysts say, is a result of consumer preference of need based / essential goods shopping for a significant period during the year, which reduced discretionary spending. 

Meanwhile, Dolat Capital opines that given uncertainty over subsequent waves of Covid-19, Avenue Supermarts may face problem of excess inventory. "While receding threat of the pandemic and sales surge in H2FY21 led the company to plan more optimistically, it may take longer-than-expected to liquidate the excess inventory," noted Himanshu Shah, VP-research at Dolat Capital, in a co-authored note with Aastha Bhatia.

Add to it, threat of virus waves may hit the company's store expansion plans in India. Dmart opened four new stores in 1QFY22, taking total store count to 238. Overall, store addition could be more than 30 in FY22, say analysts at Kotak Institutional Equities, if construction activity remains unhindered. They bake in 35 new store additions each in FY22 and FY23. 

That said, despite the given challenges Prabhudas Lilladher remains optimistic about the long-term potential of DMart on back of increasing scale and scope DMart Ready -- its online portal for shopping -- extending offerings on DMart Ready app to include general merchandise, fresh food and vegetable, growth in General merchandise sales over lower base, everyday low value focus, and steady store expansion plans.

"Imputed DMart Ready sales increased 203 per cent YoY and 39 per cent QoQ to Rs 151 crore as Covid led to faster than expected change in consumer behaviour for ordering online. The DMart Ready business continued its gradual expansion across the MMR region, Ahmedabad, Pune, Bangalore and Hyderabad. With India in midst of second Covid wave, a strong and growing network of DMart Ready stores will be beneficial," the brokerage said while maintaining a 'Buy' call on the stock and a target price of Rs 3,686.