The December quarter earnings of Avenue Supermarts, which runs DMart, seem to have disappointed investors as the stock fell more than 6 percent in intraday trade on Monday.
Avenue Supermarts on January 14 reported a 6.7 percent rise in its consolidated profit after tax to ₹589.68 crore for the quarter ended December 2022. This is against a profit of ₹552.56 crore in the corresponding quarter of last fiscal.
The company said its revenue from operations rose 25 percent to ₹11,569.05 as against ₹9,217.76 in the corresponding quarter in the last fiscal.
The stock has been under pressure in the last one year as it is down 16 percent against a 2 percent decline in benchmark Sensex.
Brokerages remain cautious
Brokerage firm Motilal Oswal Financial Services has a 'neutral' call on the stock with a target price of ₹4,050, citing soft earnings on weak discretionary demand.
The brokerage firm highlighted the company's consolidated and standalone gross margins declined 60bp YoY to 14.8 percent and 14.3 percent, respectively, 70bp below estimates, due to the mix impact from the weak discretionary segment, which garners 25-30 percent margin versus 8-9 percent for FMCG.
“We have earlier indicated the weakness in the discretionary value segment, which is pulling down margins,” it said.
Highlighting the company's management commentary, Motilal Oswal said FMCG and staples segments continued to outperform the general merchandise and apparel segments.
DMart Ready has expanded e-commerce operations in four new cities, increasing its network to 22 cities in India (versus 18 cities in Q2FY23).
Motilal Oswal underscored that the company is in the process of commencing a pharmacy shop-in-shop at one of its stores through a subsidiary, Reflect Healthcare and Retail Private Limited. This is yet another pilot that will complement the brick-and-mortar business, leveraging the existing store infrastructure.
"The recovery of revenue per store indicates that DMart has surpassed the pre-Covid level; however, a nearly 20 percent higher average store size and weak demand in the non-food category affected revenue per sqft," said the brokerage firm.
Motilal Oswal has reduced its FY23E store additions to 40 from 45 earlier and trimmed FY23 and FY24 PAT by 8 percent and 3 percent, respectively, resulting in an EBITDA and PAT CAGR of 28 percent and 26 percent, over FY23E-25E.
"We are cognizant of the prominence of new-age grocery models, their rich valuations, and weak management commentary on the non-food category, as well as lower revenue per sqft in the last few quarters. Accordingly, we value the company at 50 times EV/EBITDA on an FY24E basis and maintain our neutral rating on DMart with a target price of ₹4,050, given its expensive valuation," said Motilal Oswal.
ICICI Securities has a 'hold' call on the stock but cut the target price to ₹3,900 from ₹4,100 due to its expensive valuation.
ICICI has cut its earnings estimates for FY23E and FY24E by 5 percent; modelling revenue, EBITDA and PAT CAGR of 32 percent, 39 percent and 41 percent respectively, over FY22-24E.
ICICI believes DMart has value and volume tailwinds, including inflation (higher absolute gross profit per unit, operating leverage), and likely higher footfalls as more consumers prioritise value (read lower prices in the trading area).
"As per the revised outlook we have cut our earnings per share (EPS) estimates by nearly 5 percent during FY23-24E. Key downside risks are slower turnaround of e-commerce operations and higher-than-expected competitive intensity. Key upside risk is a significant improvement in footfalls," said ICICI Securities.
Nuvama Institutional Equities also has a 'hold' call.
Nuvama has cut the target to 55 times EV/EBITDA (from 60 times) given lower growth expectations. "Our target price works out to ₹4,193, implying 74 times FY25E PE, in sync with its pre-Covid average," said Nuvama.
Brokerage JM Financial maintained a ‘buy’ call on the stock but cut the target price to ₹4,440 from ₹4,535.
"We continue to like DMart - businesses with such long growth runways are rare and one should not get too carried away by short-term weakness(es). We reckon the stock can easily deliver double-digit compounding over the coming five years even if PER (currently 85 times FY24E) compresses significantly over that time frame," said JM Financial.
As per CNBC-TV18, Morgan Stanley has maintained an 'equal-weight' call on Avenue Supermarts with a target price of ₹3,853, citing growth and margin disappointment.
Disclaimer: The views and recommendations given in this article are those of the broking firms. These do not represent the views of MintGenie.
