Avenue Supermarts (DMart) hosted an analyst meeting on August 4 to discuss its growth outlook, new strategies and the e-commerce business.
While brokerages are positive about the company's new store openings and scaling up of D’Mart Ready, the stock's rich valuation and the company's weak revenue per square feet over the last few quarters seem to have made them cautious. Most of them have a cautious view of the stock.
The stock rose over a percent in intraday trade but ended flat on BSE on August 5.
Motilal Oswal Financial Services has a 'neutral' call on the stock with a target price of ₹3,740, implying a 12% downside in the stock price from the current market price.
"We are cognizant of the prominence of new-age grocery models, rich valuations, and weak revenue/sq. ft. over the last few quarters," said Motilal Oswal.
Motilal Oswal observed the company's revenue/sq. ft. has been sluggish (-8% CAGR) over the last three years. The management sees little cause for concern as the mass discretionary segment (27% of revenue) is yet to fully recover. It appeared optimistic that high bill values have partly compensated for the lower footfalls and cut in bill sizes.
Motilal Oswal added that the higher store size has pulled down revenue productivity, but it gives DMart an opportunity to increase product offerings to the mass value customer, thus increasing its wallet share. It also offers longer-term growth visibility. Being on an ownership model, the lower revenue/sq. ft. in the initial period is less concerning as the benefits of long-term high ROIC far outpace the lower throughput.
Despite the mushrooming of several online grocery players, DMart management appears in no hurry to scale up its online presence. The online segment attracts both value and convenience-oriented customers. DMart continues to focus on the valued customer, through its pricing and product offering, Motilal Oswal said.
"Even though it is yet to turn profitable, the management is now much more constructive on the business, with plans to (a) build new fulfilment centers in close proximity to debottleneck capacity, (b) emphasize on home delivery wherever viable, and (c) drive scale to improve economics in the online grocery business," the brokerage firm said.
"The strong growth in DMart’s footprint and cost optimization has led to a healthy EBITDA/PAT CAGR of 15%/18% over FY19-22. Revenue per sq. ft. remains under pressure due to the impact of inflation on the discretionary category and higher store sizes. We factor in an EBITDA/PAT CAGR of 37%/50% over FY22-24, with a footprint CAGR of 18%," Motilal Oswal said.
Axis Capital also has a 'reduce' call on the stock with a target price of ₹4,000. The brokerage firm said that most positives are already priced in the stock.
"DMart continues to maintain its cost leadership and has further built on it with a higher scale of business. Low base, an uptick in margin and potential pickup in general merchandise sales with normalization and decelerating inflation bode well for a strong FY23; however, at 76 times FY24E EPS, this is largely priced in," Axis Capital said.
According to a MintGenie poll, an average of 26 analysts have a ‘hold’ call on the stock.
Disclaimer: The views and recommendations are those of individual analysts or broking firms and not of MintGenie.
