Radhakishan Damani: Damani flagship D’Mart doubled profit in Q1. Should you buy or sell?

NEW DELHI: June quarter numbers of Radhakishan Damani’s flagship, Avenue Supermarts, got mixed reviews from analysts. While some found rising footfalls as a big positive, others said margins disappointed.

However, there are two things everyone agreed on: the recovery in the business is imminent, especially after the scaling up of the online segment, and stock valuation has become rich, warranting caution.

The D’Mart operator’s numbers showed the impact of a strong second wave of Covid, as the hit from the lockdown was greater compared with last year. However, rising footfalls, a 203% sales growth in D’Mart’s Ready, work on new store openings and the rapid vaccination drive raising prospects of normalcy are being seen as positives.

Avenue Supermarts’ profit for the quarter jumped 132 per cent on a year-on-year basis to Rs 115 crore. Total revenues rose 31.3 per cent on-year to Rs 5,032 crore. However, that growth came on a weak base. In fact, gross margins declined by 110 bps YoY even on a low base.

Analysts were mostly unfazed.

“We have largely maintained our estimates and expect a buoyant recovery from Q2FY22 onwards. We have factored in 24 per cent revenue and PAT growth CAGR over FY20-23. But we see a limited upside in the stock given the rich valuations,” said Aliasgar Shakir of Motilal Oswal.

The D’Mart management said there was no significant impact on the supply chain during the quarter. Inventory also moved towards normal levels, they said.

“Despite near-term challenges, we remain optimistic about D’Mart’s long-term potential on the back of rising scale and the scope of D’Mart Ready, growth in general merchandise sales on a lower base, everyday low value focus and steady store expansion plans,” said Amnish Aggarwal of Prabhudas Lilladher.

Aggarwal is among a few analysts who had ‘buy’ ratings on the stock with a DCF (discounted cash flow)-based price target of Rs 3,686, up from Rs 3,360 earlier. However, a possible third wave of the pandemic during the festival season would be a key near-term risk to this target.

On Monday morning, the stock traded 1 per cent lower at Rs 3,344.

At the current market price, the stock trades at 38 times EV/Ebitda, which some believe is fairly valued given the store revenue growth, while store expansion may moderate in the near to medium term due to the pandemic-induced uncertainties and consequent lockdown restrictions.

“Nonetheless, DMart remains well-placed in the domestic retail industry given its strong execution capabilities, disciplined strategy, lower cost of operation and streamlined distribution network,” said Gaurav Uttrani of Axis Capital, who has a ‘hold’ rating on the stock with a price target of Rs 3,110.

JM Financials was among the most bearish on the scrip and says the current price discounts “long-term hyper growth.” It maintained a ‘hold’ rating on the stocks and projected the stock to fall 14 per cent from its current level to Rs 2,905.