Shares of Avenue Supermarts, the company that operates the D-Mart retail chain in India, fell nearly 17.15% this year so far, sliding from ₹4,068 apiece to the current price of ₹3,370 apiece and are hovering near their 52-week low of ₹3,186 apiece.
The stock has undergone a correction of approximately 27% from its 52-week high of ₹4,609. It has dropped 13.92% in January, 2.44% in February, and a further 1.63% in March so far.
The decline in the stock price can be attributed to several factors, including the slow recovery in sales parameters post COVID, the deterioration in sales mix, the effectiveness of D-Mart to face the onslaught of online retail on brick & mortar modern trade, and the sustainability of the growth and profitability metrics, said brokerage firm Prabhudas Lilladher.
The brokerage believes that the deterioration in sales parameters is a result of a 3x increase in stores within emerging clusters and a 100% increase in the number of stores with less than 2 years’ vintage. The brokerage said these factors are temporary and will even out as time progresses.
Prabhudas Lilladher remains bullish on the company due to the rapid expansion of D-Mart Ready, reduced delivery time and attractive consumer proposition.
Avenue Supermarts is engaged in the business of online and multi-channel grocery and household essentials retail under the brand name of D-Mart Ready, which has expanded to more than 22 cities in Q3 FY23 from just five cities in FY21.
D'Mart Ready is finding the right balance by introducing a flat rate of Rs. 49 delivery charges for home delivery and free pickup from D-Mart Ready outlets. It has reduced the delivery time to 0–1 day from 2–3 days amid store penetration and improving the supply chain.
The brokerage noted that orders received before 12 p.m. are being delivered on the same day in some catchment areas, while others receive their orders on the next day. Additionally, there is no price difference between D-Mart Ready and D-Mart stores.
The brokerage believes that D-Mart Ready will be able to achieve a positive EBITDA by FY25 and a positive PAT by FY27, due to its attractive prices and better consumer proposition than Big Basket (the largest online retailer).
With low competition in modern trade, over 1,500 store potential in existing clusters, and rapid scaling up of D-Mart Ready, the brokerage sees a huge growth opportunity for D-Mart. It estimates a 25% PAT CAGR between FY23 and FY27 and retained its "buy" recommendation with a DCF-based target price of Rs. 4,699 apiece, up from Rs. 4,675 earlier, which hints towards an upside of 38.76%.
According to the brokerage, their channel check indicates that there has been increased consumer traction in the grocery segment due to "Everyday Low Prices" in an inflationary environment, resulting in packed stores.
The Bed, Bath, and Utensils segment has seen reduced shelf space for items such as bed sheets, towels, curtains, blankets, and towels.
On the other hand, the apparel and footwear segment has been given a higher shelf space allocation, with a considerable increase in merchandise for women, children's wear, and footwear.
The brokerage believes that these steps will eventually lead to a gradual reversal of the sales mix.
For Q3 FY23, the company reported a 6.71% increase in its consolidated net profit to ₹589.64 crore as compared to a net profit of ₹552.53 crore in the October-December quarter a year ago.
Its revenue from operations was up 25.50% to ₹11,569.05 crore during the quarter as against ₹9,217.76 crore in the corresponding quarter last fiscal.
26 analysts polled by MintGenie on an average have a 'hold' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.