D-Mart stock: no room for error
Avenue Supermarts Ltd, which runs the D-Mart supermarket chain, has reported its first set of results since its bumper listing. Here’s a stock that has gone up a spectacular 170%, including the 4.6% gain in the share price on Friday, from its issue price of Rs299. What are the key takeaways from its numbers?
To begin with, its growth rates are eye-popping. Revenue and operating profit increased 41% each during the March quarter on a year-on-year basis. Net profit growth was at a faster pace of 47% to Rs96.7 crore.
But peg that against the performance of the nine-month period ended December (9MFY17) and the March quarter profit growth is comparatively lower. Operating profit and net profit grew 49% and 53%, respectively for 9MFY17. D-Mart’s employee costs and other expenses increased at a relatively faster pace in the March quarter. Chief executive officer and managing director Neville Noronha explains that the 9MFY17 numbers include the December ending festival quarter, and also the impact of demonetization, which was positive for the company. Further, the addition of 14 stores during the March quarter itself (taking the total stores added to 21 for financial year 2017) increased operating expenses to some extent. “March quarter does have a seasonal element to it,” says Noronha.
Not everyone is impressed with the company’s overall fantastic growth rates. As S.P. Tulsian, an independent analyst, says, D-Mart’s 51% profit after tax growth for financial year 2017 is pretty mediocre, considering that the same were well-discounted on listing. Stock now discounts FY17 consolidated earnings per share of Rs8.48 per share by as much as 95 times. “Add to that, on a sequential basis, the company has disappointed both on revenues and operating profit margins fronts, having disappointed vastly in the March quarter compared to December on the margin front, especially when the December quarter was also a demonetisation one,” says Tulsian. D-Mart’s operating profit margin stood little changed year-on-year at 6.7% during the March quarter. The parameter was 8.6% in the December quarter.
What next? The company refrained from giving any guidance on revenue or net profit growth for FY18.
According to Noronha, the focus is on running a tight ship and being relevant to consumers.
As the company releases more financial statements, investors would be in a better position to evaluate the trends and seasonal elements.
Debt repayment will leave scope for better net profit margins in future, as interest costs reduce. But we must understand that as the base increases, very high levels of growth will also taper.
Kotak Institutional Equities expects D-Mart to report healthy revenue, Ebitda and profit after tax at compounded annual growth rate of 26%, 28% and 35% over FY2017-20 led by robust same store sales growth, sustained addition to store count and steadily improving margins. On 24 April, Kotak initiated coverage on the stock with a “Sell” rating and believes valuations are expensive.
Not many dispute that valuations are pricey. “I still find it hard to justify valuations, but lack of similar companies and low free float will help sustain these valuations,” says an analyst who did not wish to be named. “I won’t be surprised to see some profit booking on Monday,” added Tulsian.