Most analysts believe the shares will consolidate now given rich valuations while some say it is time to exit the stock altogether. The stock trades at its all-time highs, and is up 80 per cent from March lows.
Jay Gandhi, analyst at HDFC Securities, said DMart has finally shown growth after a disappointing first half of the current financial year. He increased his EPS estimates by 5-6 per cent to account for marginally higher revenue/square foot.
“[However], we downgrade the stock to ‘sell’ from ‘reduce’ as the recent run-up leaves no room for an investment case. We have a target of Rs 2,160 per share implying 34 times FY23 EV/EBITDA plus 2 times FY23 sales for e-commerce business,” said Gandhi.
After the recent outperformance, the stock is currently trading at 68 times its FY23 PE and 45 times EV/EBITDA ratios. So most positives, like favorable multiples, increasing traction in online business and strong balance sheet advantages, seem to be priced in.
“We, therefore, expect a period of consolidation in the stock with investors waiting to see the impact of aggressive online competition in the grocery space. We expect the management to aggressively expand both its offline and online footprint over the next two years utilizing its strong balance sheet, which should provide strong earnings visibility and thereby sustain these premium multiples,” said Himanshu Nayyar, Lead Analyst – Institutional Equities, Yes Securities.
Avenue Supermarts on Saturday reported a 16 per cent year-on-year rise in consolidated net profit to Rs 447 crore for the December quarter. The Radhakishan Damani-led chain of hypermarkets said its total revenue for the quarter came in at Rs 7,542 crore, up 10.76 per cent.
The margins for the quarter also surprised positively coming in at 15.1 per cent (up 10bps) despite the inferior mix in favor of FMCG and staples, while EBITDA margins improved 50 bps to 9.3 per cent, led by strong cost controls.
But there has been some slowdown in December (same store growth down 4%) after strong October and November, and its near-term sales mix, and the margins can be impacted by higher raw material prices and supply/availability issues in few non-FMCG categories.
In the times of pandemic, online shopping for groceries has picked up. DMart has also increased its aggression on e-commerce. In the third quarter of the current financial year, the company soft-launched DMart Ready in select pin codes of Ahmedabad, Bengaluru and Hyderabad. But how battle-ready it is is something that needs to be seen.
“Expensive valuations, coupled with risk of growth moderation owing to strong traction in online retailers in a post-COVID world and prominence of deep pocket players like Amazon and Reliance Retail, restrict near-term upside in our view,” said Aliasgar Shakir of Motilal Oswal. He has a target of Rs 2,850, implying a potential downside of 4 per cent.
Edelweiss Securities also has a similar target price, at Rs 2,864, even though it has raised its target multiple to 60x EV/EBITDA.