The food and grocery retailer, which runs the
chain of stores, bounced back in the second half of last financial year after a major hit from the Covid-19 lockdown in the first.
Analysts are now sceptical about the company’s ability to continue the dream run in the coming quarters, as they fear a hard impact from the localised curbs to control the second wave of Covid-19 and stiff competition from the fast-emerging retail venture of deep-pocket industrialist Mukesh Ambani.
Some analysts have already downgraded earnings estimates for the company on muted sales expectations for FY22, fewer store openings, and a higher proportion of low-margin grocery sales. Given the lockdown and curbs in multiple states, they expect the business to remain under pressure.
Global brokerage firm UBS in a report said DMart’s operations has got impacted since March as localised restrictions progressively increased in April and May. “Overall, 80 per cent of the stores were operating for less than 4 hours a day amid restricted selling of essential goods,” it said.
General merchandise and apparel sales had dropped sharply to 22.9 per cent to total sales in FY21, compared with 27.3 per cent in FY20. This indicates a sharp cut in discretionary spending. DMart opened 13 new stores in Q4FY21 and 22 in the whole of FY21, taking total store count to 234.
“We value Avenue Supermarts at 42 times FY22E EV/Ebitda basis, which is at a 10% discount to its one-year forward EV/Ebitda historical trading multiple, as we expect it to underperform Reliance Retail in the e-commerce business,” UBS said and assigned the stock a ‘sell’ rating with a price target of Rs 1,880.
Motilal Oswal is ‘neutral’ on Dmart, with a price target of Rs 2,850. “Expensive valuations, coupled with the risk of growth moderation due to strong traction in online retailers in a post-Covid world and the prominence of deep-pocket players restrict the near-term upside,” it said.
Avenue Supermarts reported a 52.76 per cent year-on-year jump in consolidated net profit at Rs 414 crore for March quarter against of Rs 271 crore reported for the year-ago quarter.
Consolidated total revenue rose to Rs 7,412 crore from Rs 6,256 crore a year ago. Ebitda for the quarter came in at Rs 613 crore over Rs 417 crore. Ebitda margin expanded by 160 basis points to 8.3 per cent in the March quarter.
However, global brokerage Morgan Stanley remains bullish on DMart’s long-term growth opportunity, given the large total addressable market (TAM) for grocery retail, with 96% unorganised share. It has an ‘overweight’ rating on the stock with a price target of Rs 3,218.
“March quarter earnings beat our and consensus estimates, led by better-than-expected margins,” Morgan Stanley said. “DMart was one of the best reopening plays in our coverage last year. Store footfall recovered to 96% of the previous year’s level by December. The stock has corrected since March and we expect this correction to unwind quickly.”
The brokerage said the relative peak in Maharashtra’s new Covid cases and the big push to the vaccination programme point to faster demand recovery. The company is better positioned in the online delivery platform to offset restrictive store operations.
Phillip Capital is positive on the company, as the core business remained strong and margins remained healthy in the March quarter. “The management continued the expansion of e-commerce business and increased presence in Maharashtra, even as it commenced servicing in four new cities – Ahmedabad, Pune, Bangalore and Hyderabad – in FY21”
The brokerage has marginally cut revenue expectations by 2 per cent for FY22 and 1 per cent for FY23 on weak outlook due to local lockdowns. But it has maintained a ‘buy’ rating on the stock with a price target of Rs 3,320.
“The long-term growth outlook is optimistic and the company would be the quickest to recover although near-term outlook remains uncertain,” it said.
