Shares of Avenue Supermarts, which runs the retail chain DMart, opened flat on Monday. They were trading at ₹ 3,614.20 apiece at 12:07 PM.
In the past five years, DMart’s shares gave multibagger returns of 135 percent as their share price increased from ₹ 1535 levels to the current level. Therefore, an investment of ₹ 1 lakh in the company’s shares five years ago, would have been worth ₹ 2.35 lakhs today!
Meanwhile, brokerage firm Motilal Oswal Securities upgraded Avenue Supermarts Ltd to a ‘Buy’ rating from a ‘Neutral’ rating with a target price of ₹ 4,200 per share, translating into an upside of 16.21 percent as compared to its share price of ₹ 3,614.20 apiece.
This upgrade came after the company reported healthy earnings, a strong footfall addition, cost control measures and a healthy financial position.
Motilal Oswal highlighted that DMart has grown its revenues and earnings at a robust CAGR of 23 percent and 24 percent, respectively, over the last five years. It sees a strong potential for the retail firm that grew its topline at a scorching pace and achieved a turnover of ₹ 43,000 crores. Motilal Oswal believes that the company has a long runway for growth as the modern retail space is still in its infancy in India.
Footfall Addition:
Motilal Oswal said that while most retailers found it difficult to expand their footprint in the last three years due to the pandemic, DMart clocked a 20 percent CAGR in area addition, despite working on an ownership model.
However, weak SSSG (same-store sales growth) has affected DMart’s stock price performance in the recent past. The brokerage expects that there will be a recovery in SSSG driven by the easing of general inflation, coupled with a reduction in raw material costs and the implementation of new store strategy to address the issue of smaller stores. This is expected to enhance store productivity, with a potential for increased footfall growth.
Cost Control:
Despite weak SSSG, DMart has managed to protect its EBITDA margin, unlike its peers, which witnessed a 200-450 bp margin hit. The company’s declining G&A (selling general and administrative) and employee costs acted as a cushion to cover the two percent drop in revenue productivity.
Competitive Position:
DMart has remained one of the most competitive grocery retailers, along with JioMart (Reliance Fresh), due to the recent aggressiveness of its quick commerce platform. According to the brokerage’s monthly grocery price monitor, DMart’s basket value at ₹ 8,500 was marginally above JioMart’s. Moreover, it was 8 percent cheaper than online retailers like Zepto, Dunzo, Big Basket and so on.
Well-prepared Online Business:
DMart’s online platform DMart Ready has expanded its footprint to 22 cities with store metrics that are close to breakeven. It focuses on Monthly grocery orders, unlike other quick-service e-grocers that have lower fill rates and delivery sizes.
Avenue Supermarts is a large-cap stock with a market capitalization of ₹ 2,36,222 crores. It has an ideal return on equity of 15.99 percent and an ideal debt-to-equity ratio of 0.04. Its shares were trading at a price-to-earnings ratio of 99.67 which is higher than the industry average of 26.42, indicating that investors might be willing to pay a higher amount for the company’s future earnings.
