Ever since its IPO in March-17, billionaire Radhakrishnan Damani-led Avenue Supermarts shares have been on a rising spree. The shares had a blockbuster IPO, as the shares listed at Rs 603, as against the issue price of Rs 299, even as a few brokerages had advised investors to stay neutral on the issue given rich valuations. Now , more than an year later, the share prices have soared to Rs 1,481, implying a return of nearly 500%.
At current prices, analysts suggest that the stock is indeed overvalued. “At current levels, D-Mart appears to be way ahead of its fundamentals. The PE (Price to Earnings) is near 130 times. Our aggressive estimates peg the fair value at Rs 1,300, while its Rs 1,100 in a conservative scenario,” Rajnath Yadav of Choice Broking told FE Online.
“The current valuations for DMart will require the company to grow at over 50% for the next year continuously while generating strong free cash flows. This is unlikely. While it is true that strong growth will continue, the current valuations reduce future returns potential as most of the positives are already built in,” investment advisor Sandip Sabharwal told FE Online.
Analysts from Prabhudas Lilladher point out that the overvaluation has become more pronounced since their last report which recommended a reduce rating. “We estimate 29.6% EBIDTA and 39.7% PAT CAGR over FY17‐20. D’Mart currently trades at 50xFY20 EPS of 21.4, given low float. We estimate that the stock is factoring in 43% PAT CAGR to generate 13% IRR over 2017‐22 as against our estimate of 34% PAT CAGR,” the firm had said.
But then why is the stock continuing to rise? Rajnath Yadav explains that the stock is not correcting due to the limited free float in the stock market. Further, the institutional investors who hold the stock, continue to latch on. Notably, more than 80% shareholding rests with the promoter. On similar lines, Rajen Shah, Chief Investment Adviser, Tradebulls told ET Now recently that the floating stock is very low and there is a lot of fancy for this company.
While the stock maybe overvalued, analysts point out that DMart is one of the most profitable businesses and has a very sound business model. “DMart is catering to the mid-segment of the market. The strategy seems to be to sell daily use products, with a special focus on the food and beverages segment,” Rajnath Yadav said.
What should investors do with the shares? “The franchise and business proposition is obviously strong. However to grow at a rate to justify current valuations the company will need to get into new geographies and expand in regions beyond its comfort zone where there might be entrenched local players too. Margins are already at the highest for any retail company globally and are unlikely to move up further. The potential for negative surprises are higher at this stage than positive surprises given the valuations. Investors will need to wait out for some bad news or bad results to take exposure at cheaper valuations,” Sandip Sabharwal advises.