Avenue Supermarts (DMart), which is controlled by Radhakishan Damani, seems to be an appealing buy for the long run owing to the business’s robust footprint extension, cost control measures, and stable financial condition, investors may be tempted to purchase shares of the firm.
Over the course of the last three months, the shares of DMart have increased by more than 5%, moving in tandem with the benchmark Sensex, which has also increased by 5% over the same time period. On September 2, 2022, the price of the stock reached a new 52-week high of 4,606.
The stock price has decreased by 23 percent from its all-time high as of the conclusion of trading on June 8, 2024.
Is it a good time to open fresh positions?
This is the opinion of the brokerage company Motilal Oswal Financial Services. The company has given the stock a rating of ‘buy’ and set a target price of 4,200, which together mean that the stock has an upside potential of 18%.
Motilal Oswal has a bullish outlook on the company since it pointed out that DMart has increased both its sales and its profits at a healthy compound annual growth rate (CAGR) of 23 and 24 percent, respectively, over the course of the last five years.
The brokerage company believes that there is a significant opportunity for the retail company. It has just about scratched the surface in our opinion after increasing the topline at this blazing rate and generating a turnover of 43000 crore. Motilal Oswal said that they feel there is a long runway for expansion for the company since the contemporary retail industry in India is still in its infancy.
The brokerage firm said that DMart’s stock price performance in the recent past has been negatively impacted by the company’s lackluster SSSG (same-store sales growth).
According to Motilal Oswal, premium valuations are warranted for DMart because of its extraordinary consistency in producing industry-leading growth, margins, and ROCE (return on capital employed), despite having a very asset-heavy business model.
The brokerage company thinks that fears about a developing online grocery market are unnecessary since the percentage of both online and contemporary retail is minuscule in the entire grocery industry, and the market potential is quite large. Additionally, the brokerage firm believes that the market opportunity is immense.
According to our analysis, SSSG gains in FY24 should result in an increase in valuation multiples. In order to get to our target price of 4,200 for DMart, we have valued the company at 40 times the FY25E EV/EBITDA and an implicit PE of 64 times on June 2025. According to Motilal Oswal, this is consistent with their three-stage DCF valuation, which involves the construction of long-term cash flows and the assumption of a terminal growth rate of 4% and a cost of capital of 11.5%.
Motilal Oswal brought attention to the exceptional achievement of DMart in terms of footprint expansion. It was said that whereas the majority of retailers found it difficult to extend their footprint in the previous three years owing to Covid, DMart while operating on an ownership model, registered a robust 20 percent CAGR in area addition during FY20-23, which translated into 19 percent revenue growth.
The brokerage firm noted that the decline in the value category’s discretionary demand resulted in the category’s share falling from 27 percent in FY20 to 23 percent in FY23. The addition of large stores in the past few years (an increase in average store size of 23 percent over FY19-23), dragged down store productivity. Additionally, the brokerage firm attributed the decline in SSSG to these factors.
DMart recorded a standalone net profit of 505.21 crores for the quarter that ended in March 2024. This is an increase of 8.3 percent when compared to the net profit of 466.35 crores that was reported for the same quarter in the previous fiscal year.
When compared to the sales of 8,606.09 crores that were recorded in the same quarter of the previous fiscal year, the firm generated revenue of 10,337.12 crores, an increase of 21.11 percent.
