Radhakishan Damani’s DMart has outperformed Nifty50 so far, but should investors buy the stock now?

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Published: May 26, 2020 10:47 AM

Continuing its odds-defying movement, Radhakishan Damani’s Avenue Supermarts has seen its share price jump 26% from their recent lows on the Nifty50, outperforming the benchmark index.

Lower Circuit in Avenue Supermart stock, what expert says, D-Mart, RK Damani, avenue supermart store shut due to lockdown, COVID-19 impact on D-mart, एवेन्यू सुपरमार्टDMart’s revenue grew for the March quarter stood at 23% on-year basis while profit after tax grew 41%, both below estimates.

Continuing its odds-defying movement, Radhakishan Damani’s Avenue Supermarts has seen its share price jump 26% from their recent lows on the Nifty50, outperforming the benchmark index. However, that could soon change for the retail giant as coronavirus plagues store sales. DMart’s revenue grew for the March quarter stood at 23% on-year basis while profit after tax grew 41%, both below estimates, which is for the first time that Radhakishan Damani’s company has missed expectations. With the fall in estimates and the brewing headwinds that the DMart is likely to face, top brokerage firms are cutting the target price for the stock and changing recommendations.

While ICICI Securities sees the inflation, lower store throughput and the upcoming challenge from JioMart as some of the headwinds that Avenue Supermarts will face this fiscal year, it has cut its target price to Rs 2,200 and is now advising investors to ‘reduce’ downgrading from the ‘hold’ recommendation it previously had. “We cut earnings estimates by 7-14% to reflect greater-than-expected margin impact; modelling revenue / EBITDA / PAT CAGR of 25% / 29% / 32% over FY20-22E,” ICICI Securities said in a report. The retail giant that saw its share price surge almost 100% between May 2019 and February this year. 

Avenue Supermarts has also announced a hardship allowance for employees working during the coronavirus lockdown, which will increase the operational cost for the company, clubbed with sanitation and hygiene costs. Loss of sales of higher-margin products such as apparels resulted in 118 basis points on-year reduction in gross margins. “April 2020 revenues were down 45% yoy while the first fortnight of May 2020 saw 17% growth on a month basis. Margin erosion is to be expected on account of nil/marginal general merchandise sales as well as higher cost of store sanitization,” said brokerage firm Kotak Securities in a report. Kotak Securities pins a fair value of Rs 1,480 on the stock. Although DMart did serve customers during the lockdown period, using means such as home delivery and online ordering, the company has said these were temporary measures. With social-distancing still in practice the footfall in stores is likely to remain subdued.

Earnings before interests, tax, depreciation, and amortization (EBITDA) margin were seen to be at a low of 6.7% for DMart while staff cost shot up to 1.9% for the first time since 2018. With 18 stores added in the March quarter, DMart now has a total of 214 stores in India. It added 6 stores in Maharashtra, 4 stores in Karnataka and 3 stores in Gujarat, all these states have a significantly high number of coronavirus cases. Brokerage firm Prabhudas Lilladher has cut its earnings per share estimate for the stock by 16.8% for the current fiscal while bringing the target price down to Rs 1,658 per share. “Valuations at 82xFY22 and 65xFY23 with current price justification at 9% terminal growth looks unappealing,” it said.

The stock has almost recouped all the losses during the March mayhem but the outlook looks uncertain with rising costs and expected lower store footfall DMart might have to continue its home delivery and online ordering options for customers.

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