JMFL
Avenue Supermarts (Buy)
CMP: ₹1,333.15
Target: ₹1,725
DMart’s 2QFY19 earnings-report reflects a massive margin disappointment (8 per cent versus 9.1 per cent in 2Q LY and 8.9 per cent for FY18) which is likely to mask the excitement that a 38.9 per cent growth in revenue would otherwise have created. The business has brought down prices across categories to further drive store-throughput; the consequent EBITDA miss of 3.7 per cent versus our forecast, however, means that the incremental revenue garnered through the price-cuts (2QFY19 revenue was 8.7 per cent ahead of our expectation) have not been able to entirely protect the business’ profit pool — at least not just yet.
We reckon it could take a few quarters before operating leverage starts to entirely offset the margin erosion impact, but we are confident that the same will happen sooner or later. We have adjusted our near-term operating profit forecasts by 4-5 per cent to reflect the short-term impact of the new pricing strategy.
Our DCF-based target price remains broadly unchanged (₹1,725/share). Any sharp stock correction should be used as a buying opportunity.