Despite strong Q3 show, why is D-Mart still a sell for analysts?

KS Badri Narayanan Chennai | Updated on January 13, 2020

Avenue Supermarts (D-Mart) on Saturday reported a strong set of financial numbers for the third quarter ended December 2019. Yet, analysts said the stock is overvalued and may head for a correction.

The stock of D-Mart, after opening strongly at ₹1,921 and surging further to ₹1947, is currently hovering around ₹1,897 (10 am), still a gain of 1 per cent, in early trade on Monday.

D-Mart’s robust execution on core retail operating parameters in an environment of consumption slowdown is quite impressive and demonstrates the superiority of its business model said Motilal Ideal in a note.

Financial results

Avenue Supermarts reported a better-than-expected 53 per cent year-on-year rise in standalone profit at ₹394 crore against ₹257 crore posted for the same quarter last year.

Revenue for the quarter rose 23.90 per cent to ₹6,752 crore (₹5,451 crore) and EBITDA of ₹593 (₹453 crore) year-on-year. EBITDA margin for the quarter was at 8.8 per cent, a rise of 50 basis points over 8.3 per cent in December quarter of 2018.

Its consistent superlative performance has ensured strong valuation re-rating in the last three years since its listing and resulted in massive outperformance vs market and other retail peers, Motilal Oswal said.

However, D-Mart’s valuations at 54x FY22 P/E and nearly 35x FY22 EV/EBTTDA are expensive and provides no margin of safety, said the broking firm, while maintaining sell with target price of ₹1,700.

Analysts overview

According to HDFC Securities, while D-Mart posted healthy growth in Q3, the pace of growth has come off consistently over 9M-FY20 due to a heavier base and ever-heightening competitive intensity.

"What is more worrying is the dip in the anchor variable - sales velocity (revenue per sq ft) over the last nine month partly due to larger-sized stores. This certainly warrants a closer look to assess how close is D-Mart to its peak on throughput, cost and working capital efficiencies, it added while retaining 'sell' call with a target price of ₹1,250.

Edelweiss Securities, which maintains reduce rating and a price target of ₹1,650, said: "With all other costs being steady (as a percentage of sales), EBITDA margin expansion continues to be led by the gross margin expansion, which we believe is a result of the change in product mix and pricing renegotiation with vendors. That said, we continue to believe D-Mart has limited room for EBITDA margin expansion via productivity gains."

However, global advisors Goldman Sachs and JP Morgan remain positive with a price target of ₹2,138 and ₹1,960 respectively.

Published on January 13, 2020

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