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    Analysts are suddenly not too sure about Damani’s high-flying DMart

    Synopsis

    The stock has mostly defied analyst ratings ever since its listing in March 2017. It remained resilient even at the peak lockdown phase of Covid-19, and has managed to rise 17 per cent this year against an 8 per cent drop in the BSE Sensex.

    In its annual conference call, the company management reiterated its stance of not aggressively foraying into e-commerce and instead focusing on further consolidating its position in the brick & mortar format.
    NEW DELHI: Billionaire investor Radhakishan Damani’s Avenue Supermarts (DMart) took a hard knock from the Covid-19 lockdowns. But it is bouncing back fast with 95 per cent of its stores operational now, and sales rising to 80 per cent of pre-Covid levels.

    In its annual conference call, the company management reiterated its stance of not aggressively foraying into e-commerce and instead focusing on further consolidating its position in the brick & mortar format.

    But analysts are a worried lot.

    They feel the fast expansion of deep-pocket Amazon and entry of Reliance Retail’s JioMart in online retail will create significant headwind for DMart going ahead. Avenue runs 220 D-Mart Ready online stores.

    Some analysts are also skeptical of store openings and demand recovery in the high-margin apparel business in FY21.

    Still, they swear by Dmart’s proven business model and exceptional performance among peers. The stock had seven ‘underperform’ ratings on the publicly available Reuters Eikon database this Thursday against just one three months ago. ‘Sell’ ratings stood unchanged at five, but there was only one ‘buy’ rating against three, a quarter ago. The number of brokerages recommending ‘outperform’ rating on the stock has fallen to five from six.

    The stock has mostly defied analyst ratings ever since its listing in March 2017. It remained resilient even at the peak lockdown phase of Covid-19, and has managed to rise 17 per cent this year against an 8 per cent drop in the BSE Sensex. The scrip is up 44 per cent for the last one year and 617 per cent since listing, making analysts turn wary of valuations.

    Data showed online store BigBasket’s monthly orders jumped to Rs 720–730 crore in July (Rs 9,000 crore annually at this rate), which is equivalent to 30–50 per cent of the sales at top offline grocery retailers.

    This marked three-times growth in BigBasket’s sales against last financial year’s two times. Analysts say BigBasket is seeing very high customer retention, with a huge number of repeat orders in groceries, typically the slowest to move online, thus creating customer loyalty.

    “The growing scale of online retailers, including the prominence of deep-pocket players such as Amazon and Reliance Retail, and the potential moderation in growth and return profile may restrict a re-rating for DMart. We value the stock at a 35 per cent discount to the three-year average EV/Ebitda multiple of 65 times, implying 7 per cent downside,” Motilal Oswal Securities said.

    DMart deals in three segments: foods (groceries), non-food (FMCG) and general merchandise and apparel. The food segment accounted for 52 per cent of revenues in FY20, non-food 20.29 per cent and apparel 27.31 per cent.

    As only lower margin food and non-food FMCG categories were allowed to operate during lockdown, the overall margin was hit during the June quarter. DMart said it started selling non-essential goods only from the middle of June.

    TableAgencies

    Kotak Securities said that general merchandise sales are not back to pre-Covid levels due to a mix of factors, including customers not intending to spend too much time in stores and hence not stepping into that section. They are also deferring purchases due to lower incomes and lower purchasing power.

    DMart does acknowledge that there may be a need to provide an alternate shopping channel to customers. “It is monitoring the e-commerce trend carefully, and will expand their Dmart Ready operations should the need arise. For now, Dmart Ready expansion would remain calibrated,” Kotak said.

    DMart expects a muted rate of store addition in FY2021, but expects the activity to pick up in FY2022. It plans to open 59 stores over FY2021-22, though store additions may be back-ended due to tepid construction activity in FY2021, Kotak said.

    “We continue to see medium-term headwinds – low inflation, lower store throughput (social distancing norms, transport restriction), revival of Kiranas – to be further accentuated by the launch of JioMart, acceleration in adoption of online ordering, inferior product mix and higher operational costs,” ICICI Securities said, while recommending a ‘reduce’ rating on the stock with a target of Rs 1,850.

    Avenue Supermarts last month reported an 87.61 per cent year-on-year (YoY) plunge in consolidated net profit at Rs 40 crore for the June quarter compared with Rs 323 crore profit reported for the year-ago period.

    The hypermarkets chain said its consolidated total revenues fell 33.22 per cent YoY to Rs 3,883 crore from Rs 5,815 crore, while profit margin contracted 450 basis points YoY to 1 per cent from 5.5 per cent.

    During June quarter earnings, DMart said that unlike developed countries where organised retailers had a surge of customers walking into their stores, it did not happen with the same intensity at its stores.
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    9 Comments on this Story

    sant kumar42 days ago
    Dmart is best for common man. Great business model.
    sant kumar42 days ago
    No doubt about that. DMART is one of the best. Due to lock down and Virus fear customers are little reluctant to visit stores. But Dmart Stores have been doing great job as compared to Jio mart. Great price and smooth service. But they have to focus on building infrastructure for online delivery because Jio mart has started and will be doing better in future because of great brand value and capex. First choice of groceries is always DMART. Too much room for growth in the urban areas. Investors must be positive and keep invested. This stock will definitely grow because business is going to expand further.
    42 days ago
    Dmart has definitely won the trust of its customers.However considering the customer's convenience and benefits, they must go in big way for online mode as they have done during lock down when customers have really appreciated in big way. Further they need to improve online portal for order tracking till delivery is made which was not available during lockdown. The portal with exhaustive and statuswise information is available with other full time online vendors. Of course dmart should make fruits and vegetables available in their products. With incorporating above, I am sure and confident that dmart will be able to handle market competition effectively and keep up their top line and bottom line.
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