Avenue Supermarts: Analysts see pressure on gross margin

Our Bureau Chennai | Updated on October 16, 2018 Published on October 15, 2018

Market gave thumbs down to Avenue Supermarts after Q2 results. The stock slumped 5.50 per cent to end at ₹1,333.15 on the BSE after hitting the day’s low of ₹1,310. According to analysts, though the company has posted strong revenue growth, it is feeling the pressure on margins.

Avenue Supermarts, a DMart supermarket’s chain, had posted 18-per cent y-o-y jump in net profit to ₹225.7 crore for the quarter ended September 30, and 29 per cent rise in revenues at ₹4,872.5 crore.

Ambit Capital, which maintains its ‘sell’ call on the company with a price target of ₹1,021, said the topline growth was led by price cuts across categories, resulting in 180 bps y-o-y GM decline to 14.3 per cent (versus expectation of 16 per cent). “Hence, EBITDA margin declined 110 bps to 8 per cent and absolute EBITDA was 3 per cent below our estimate,” it reasoned out.

Revenue CAGR of 24 per cent over the next decade, 100 bps margin expansion and improved working capital from sale are factored into valuation of 63x FY20E EPS, Ambit said, and added: “To achieve such growth, DMart needs to hike store roll-out by 4x (80 annually) by FY30, which is tough given the own-store model.”

Rich valuation

Even Walmart, which witnessed an exhilarating 36 per cent CAGR over FY68-98, never enjoyed such rich valuations, Ambit said.

For Kotak Institutional, DMart’s 2QFY19 results were disappointing. While revenue growth of 39 per cent surprised positively, gross margins were sharply below estimates, resulting in a 13 per cent miss in EBITDA. “The company’s cost control remains strong and is a key driver of operating leverage. We raise our revenue growth estimates, though a lower gross margin assumption leads to broadly unchanged earnings estimates,” it said.

DMart’s execution engine remains healthy, though its model does not allow it to keep increasing margins perpetually, as is expected by the street. “Our target price increases to ₹890 from ₹860 as we take in higher revenue growth estimates in the future and roll forward our target price to September which offsets the 50 bps increase in WACC and moderation in gross margin assumptions,” the Kotak report added.

Published on October 15, 2018
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