DMart share price tanks 13% in 5 days; eroding profits hit investor confidence, should you invest?

Share price of Radhakishan Damani’s Avenue Supermarts has tanked 14% since the beginning of this week after the company’s hypermarket chain DMart reported a sharp 88% fall in net profits. Although market participants are expecting DMart to be the least hit hypermarket chain by the coronavirus lockdown, the management commentary for the short-terms was anything but optimistic. The stock is currently trading at Rs 1,955 apiece on the BSE Sensex after closing a price of Rs 2,007 per share on Thursday, translating to a 2.5% fall.

Consolidated total revenue for the hypermarket chain stood at Rs 3,933 crore in the June quarter, down from Rs 5,825 crore in the same quarter last year. Operations were hit as a number of stores remained shut during the lockdown period. Apart from stores being hit by the lockdown, changing trends in discretionary spending are also hitting Radhakishan Damani’s DMart. “Top-line was negatively impacted mainly due COVID-19 lockdown. Currently, the company’s most of the stores operate at 80% of pre-covid sales level. However, discretionary consumption continues to be under pressure, especially in the Non-FMCG categories,” said Amarjeet Maurya, AVP – Mid Caps, Angel Broking.

DMart’s revenues fell 35% on-year basis while gross margins shrunk 220 basis points. DMart is expected to go slow on store addition this fiscal but the same, analysts say will rebound in the financial year 2022. Although analysts at Motilal Oswal say that, in a market where investors are worried about returns on their portfolios, DMart acts as a classical defensive and safe-haven, they advise selling the stock with a target price of Rs 2,000. Valuations of the stock are being termed as expensive with target prices for the stock estimated by most brokerages t be around Rs 2,000 per share. However, brokerage and research firm Edelweiss is still positive on the stock with an eye on long-term gains. “We remain positive on DMart’s long-term story, underpinned by deepening penetration, improving market share and demand shift to organised retail,” Edelweiss said in a recent note.

The outlook given by the company said that there was no surge in customers as witnessed in western countries. Local stores have been at the forefront of providing households with their daily needs during the lockdown phase, something that has hit hypermarket chains. “This was because of the strong enforcement of store shutdowns, restrictive movement of people in general, and strict social distancing rules inside stores. While the overall lockdown rules have softened in general, they continue with the same or more severe intensity in certain cities and local municipalities from time to time,” Neville Noronha, CEO & Managing Director, Avenue Supermarts, said.