Avenue Supermarts hits valuation hurdle, stock at 124 times FY23 earnings

Margin disappointment weighs on stock, which has gained 47% in 3 months

After hitting its all-time high intraday, the stock of retail ma­jor Avenue Supermarts (DMart) slipped over 8 per cent. This was because the margin performance was lower than the Street’s expectations, though revenue growth was strong.
 
The biggest concern, however, is its valuation, which is on the expensive side. The stock is trading at 124 times its financial year 2022-23 (FY23) earnings estimates, compared with the sector average of 65 times.
 
Analysts, like Anand Shah of Axis Capital, highlight that at the current price the stock is trading at a market capitalisation (m-cap) to store and m-cap to square feet of $187 million and $4.8 billion, respectively, which is a 5-13 times premium to Walmart. It is also a 4 times premium to Walmart’s peak valuation in December 1999 of $48 million per store, they add.
 
Despite the sharp fall on Monday, the stock has gained 49 per cent over the past three months and is up 133 per cent since January. Among those that benefited are the company’s Chief Executive Officer Ignatius Navil Noronha, who holds 2.02 per cent of shares in the company. He became a billionaire when the stock rose intraday, but is now worth Rs 6,400 crore.
 
Most brokerages have downgraded their ratings, given the jump in stock prices. While Kotak Institutional Equities has raised the fair value of the stock to incorporate higher growth for offline and separate value for DMart Ready, Garima Mishra and Shubhangi Nigam of the firm believe that the stock is pricing in perfect execution and limited competition.
 
Though the company posted an expansion of margins both at the gross and operating profit levels, it missed Street estimates. The improvement in share of the non-essential or general merchandise was positive, though it was not enough to push the gross margin beyond 14.3 per cent while analysts were working with a range of 14.6-15.1 per cent.

 
HDFC Securities says the lower-than-expected gross margins suggest non-essential contribution remains lower than at the pre-pandemic levels, though it is improving. Tight cost controls helped the company drive a sha­rper 253 basis points (bps) rise in operating profit margins to 8.8 per cent.
 
On the revenue front, growth was robust at 46.6 per cent on the back of store additions and higher revenues per square feet. The company opened eight stores in the quarter, taking the store count for the first half of FY22 to 12, while the overall count stands at 246 stores.
 
The overall revenue per square feet is at 90 per cent of the levels two years ago. As footfalls rise due to unrestricted hours of operations, pent-up demand for products/general merchandise, revenue growth and per store metrics should reach pre-pandemic level over the next couple of quarters.
 
A strong balance sheet, expansion of both its offline and e-commerce (DMart Ready) units, and large market opportunity (unorganised to organised) should keep growth run rate strong, but the stock is factoring in most of the gains. Investors should await further correction before considering the stock.