DMart shares Buy or Sell? Net profit tanks 37%; analysts mixed on recovery expectations

Avenue Supermarts’ share price soared 3.6% to trade at Rs 2,055 per share today despite its hypermarket store chain DMart reporting a weak set of quarterly numbers. The firm led by billionaire Radhakishan Damani reported a net profit of Rs 210.5 crore against Rs 333.45 crore from a year-ago period, seeing a massive 37% drop. Total income of Dmart dropped 12% on-year to Rs 5,274 crore. The slip in profits was due to lower store footfall and repeated lockdowns across the country. Although the management highlighted that the festive season would help restore demand, it warned of supply-side challenges.

Sell on delayed recovery?

With normalcy yet to resume for DMart, analysts at Kotak Securities have trimmed their financial year 2021-23 earnings estimates by 11-18%, banking on prolonged pandemic and slower recovery in revenues. “Loss of sales of higher margin products (general merchandise and apparel) resulted in a 102 bps yoy reduction in gross margin to 14%. This drove a 4% EBITDA miss compared to our estimates,” Kotak Securities said in a report.

In the current quarter, sales are expected to pick-up, aiding the revival in margins. To add to this, the increasing competition in the retail sector is expected to play spoilsport for Radhakishan Damani’s DMart. “We retain SELL rating with revised FV of Rs1,475 (earlier Rs1,530),” the report said.

The latest set of numbers point at a slower than expected recovery for the firm. “Sales per sq.ft. declined 30% on-year leading to 37% year-on-year EBITDA decline. Recovery of only 87.5% in mature stores (2-year-old and more) for exit month (September) implies delay in recovery,” said Ambit Research. From here on, analysts at Ambit expect limited market-share gains from kirana stores as consumers may avoid crowded brick-and-mortar stores. 

Store count increased marginally to 220 at the end of the quarter. DMart added 6 new stores in the previous quarter and closed 2 stores to be converted into fulfilment centres for E-Commerce business. “DMart has expanded its E-Commerce operations (DMart Ready) in select pin codes of Pune City as well while converting two stores into Fulfilment centres in Mumbai,” Ambit said. Revenue from DMart Ready was up in the quarter to Rs 88 crore. Ambit has a target price of Rs 2,000 with a sell rating on the stock.

Demand for essentials to help keep DMart up?

95% of Dmart’s stores have now resumed operations but continue to bear the brunt of repeated lockdowns and other stringent measures by local authorities. However, the management has maintained a positive outlook. “Over the years, D-Mart has proven to be a resilient business model generating superior RoIC of 23% and healthy fixed asset turnover ratio of 4.1x,” said ICICI Direct in a note. Year to date, DMart shares are up 11.5%. Expecting a revenue and earnings CAGR of 19% and 24%, ICICI Direct has upgraded the stock to a ‘Buy’ rating with a revised target price of Rs 2,300.

Brokerage and research firm Prabhudas Lilladher expects E-commerce sales to improve as the company increases focus on the segment. The brokerage firm has cut EPS by 10.6%, 3.4% and 2.9% for FY21/22/23 but upgraded the stock to ‘Buy’ with a target price of Rs 2,316 apiece.