Radhakishan Damani’s DMart hits fresh highs, but analysts shy away from giving buy calls

Radhakishan Damani’s Avenue Supermarts saw its share price surge to a fresh all-time high of Rs 3,130 per share on Monday morning as investors reacted to the strong earning growth of the firm. Avenue Supermarts, which own and operates the supermarket chain DMart, on Saturday, reported a 16.3% on-year jump in net profit to Rs 446.95 crore for the October-December quarter of the current fiscal year. This strong growth in profits was aided by an 11% jump in revenue for the firm as consumption picked up with India moving away from lockdowns as it looked to control the spread of the coronavirus.

Results beat estimates

However, analysts do not seem to be interested in giving a ‘buy’ call to the stock despite its stellar performance. Domestic brokerage and research firm Kotak Securities said that the revenue growth was ahead of expectations driven by strong festive demand, near-normal store operations and steady recovery in general merchandise sales. It did raise earning estimates expecting stronger margins but gave a ‘sell’ recommendation with a fair value of Rs 1,885. “Sharp stock price performance bakes in consistent revenue growth (possible, in view of large growth opportunity) and margin expansion (difficult, in a competitive business which may see sizeable capital infusion from peers in the near-term),” they added.

Valuations stretched

Since October, the stock price of Avenue Supermarts has jumped more than 50% making the valuations stretched. Analysts at Yes Securities said that the stock is currently trading at 68x FY23E P/E and 45x EV/EBITDA. “We, therefore, expect a period of consolidation in the stock with investors waiting to see the impact of aggressive online competition in the grocery space,” they added.

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Pickup in earnings does give a strong outlook for what is in store for the company but the recent run-up is believed to have left no room for further growth in stock price.HDFC Securities has increased its EPS estimates by 5-6% to account for marginally higher revenue/sq. ft, but has downgraded the stock to ‘sell’ saying that the recent run-up leaves no room for an investment case. “An extended slump in non-essential sales could mean that discounting in staples will be lower, thereby opening up the space for competition. This, coupled with punchy valuations, leaves no margin of safety/error for the investor and the business,” they added.

E-commerce push to watch out for

The renewed focus on Radhakishan Damani’s DMart on e-commerce is, however, finding a favourable response. “Factoring beat in performance, we revise up FY21/22E PAT 11%/8%. Also, increased e-com aggression and potential market share gains enhance growth sustenance visibility,” said Edelweiss Securities in a note. With a target price of Rs 2,864 per share, Edelweiss has a ‘Hold’ rating on the scrip.