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NEW DELHI: Radhakishan Damani-led Avenue Supermarts' maiden analysts’ meet has left investors with more worries over stock valuation that before.
Brokerages tracking the stock now say prevailing earnings multiples do not capture the challenges that the company faces in new store additions and in terms of maturing same-store sale (SSS) growth and likely pressure on margins.
D-Mart is an excellent business with store ownership being its biggest moat, as that helps the company keep the costs low.
But at current valuation, the risk-reward looks unfavourable, they said.
The top brass at India’s most buzzing retail stock in recent times told analysts that SSS growth would moderate going ahead, as the share of mature store sales rises.
Same-store sales refer to the difference in revenue that the retailer generates from existing outlets over that in the same period of the preceding year.
For D-Mart, the growth moderated to 14 per cent in FY18 from 21 per cent in FY17.
The pace of new stores additions is growing, as the company added 24 in FY18 against 21 in FY17.
It is looking to add 50–60 new stores over next two to three years.
Foreign brokerage Citi has maintained ‘Sell’ rating on the stock with a target of Rs 1,255, while JP Morgan is underweight on it with a target of Rs 1,050.
The stock traded at Rs 1,536 on Friday.
The company management highlighted that SSS growth varies sharply between mature and new stores, with mature stores growing closer to the inflation rate.
The mature stores have seen store-level capacity constraints.
As their percentage in total stores rises, overall growth may suffer, said IIFL, a Mumbai-based brokerage.
DMart believes Ebitda margins were at elevated levels in FY18.
It expects gross margins to steady at 14-15 per cent against 15.9 per cent in FY18.
The risks highlighted and reiterated by the management are not adequately factored in the 77 times FY20 EPS, IIFL said.
The brokerage has a reduce rating on the stock with a target of Rs 1,250.
Kotak Securities has an even lower price target at Rs 860, nearly half of current price.
It said there was much to like in D-Mart’s business model and growth strategy.
But lofty valuations do not allow it to turn constructive on the name.
“We revise our DCF-based target to Rs 860, as we roll forward to June 2020E.
Our sell rating stays,” it said.
Of late, DMart has been toying with the idea of adapting a store-leasing model, which Kotak says may prove to be cheap in the initial few years, but eventual lease renegotiation typically makes the cost of leased stores higher than owned stores in the long run, it said.
The company has unveiled a new initiative, called DMart Ready stores, on a pilot phase.
There are 58 such stores as of now, which make a paltry contribution of 0.01 per cent to total revenue, Edelweiss Securities said.
DMart is also evaluating a foray into cash-and-carry.
"The objective is to enhance shopping convenience, tackle deepening competition from e-commerce and de-congest mature stores.
Lack of offerings such as fresh fruits and vegetables will limit growth for D-Mart Ready," Edelweiss said.
It says while D-Mart is a long-term play on the Indian retail story, the stock appears to have limited upside from current level.
The brokerage projects the company to report revenue, EBITDA and PAT growth at a CAGR of 25.6 per cent, 32.3 per cent and 33.2 per cent, respectively, over FY18–20E.
The brokerage has a hold rating on the stock.
