DMart’s 110% rise in net profit fails to impress investors; analysts see massive downside

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October 18, 2021 1:10 PM

Analysts are advising investors to sell the stock, predicting downside potential and highlighting extremely expensive valuations.

Avenue Supermarts has reported a 110% profit growth (Image: REUTERS)

Radhakishan Damani’s Avenue Supermarts reported a strong 110% rise in net profit in the July-September quarter but failed to impress investors as the stock tumbled more than 5% on Monday morning. Analysts too were unimpressed, advising investors to sell the stock, predicting downside potential and highlighting extremely expensive valuations. DMart share price initially hit a high of Rs 5,899 apiece but soon slipped from the highs and was sitting near an intra-day low of Rs 5,014 per share. So far this year, DMart’s share price has galloped a whopping 85%.

Too expensive

Analysts have highlighted DMart’s expensive valuations. The stock’s recent run-up and valuation (92x FY23E EV/EBITDA) have happened without any fundamental change in business prospects, said Edelweiss Securities. “The massive opportunity in organised B&M grocery size is factored in, and a further re-rating is now dependent on significant strides in its online grocery operations or a step-up in-store addition, neither of which is yet visible,” they added.

Although the business has grown despite the challenges posed by the pandemic, ICICI Securities said that the extremely expensive valuation limits their willingness to have a constructive view. Avenue Supermarts trades at 128x P/E on FY23E, according to their estimates.

Time to sell?

Motilal Oswal: Analysts at Motilal Oswal have a ‘Neutral’ rating on the stock and have revised their target price upwards. However, despite the revision, the new target price implies a 6% downside potential. “Unlike other retail categories, grocery retailers such as DMart have seen a limited impact and swift recovery from Covid-19, with healthy margin improvement,” they said. The target price has been set at Rs 4,900 per share. 

ICICI Securities: The brokerage firm has downgraded the stock to ‘Sell’ rating from the previous ‘Reduce’ with a target price of Rs 4,000 per share. “We downgrade the stock to SELL (from REDUCE) with a DCF-based revised target price of Rs 4,000. Key upside risks are fast turnaround of e-commerce operations and lower-than-expected competitive intensity,” they said. The brokerage firm has maintained that the earnings performance was good, however, the expensive valuations have limited their view on the stock. The target price translates to 20% downside potential.

Edelweiss: Analysts at Edelweiss have the lowest target price set for the stock at Rs 3,782, which has been revised upward from Rs 3,211 earlier. The brokerage firm has downgraded the stock to a ‘Reduce’ rating from ‘Hold’ earlier on the back of the recent run-up in valuations. DMart is expected to take its store count to 274 by the end of this financial year. 

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