Mumbai: Avenue Supermarts Ltd, which runs the D-Mart supermarkets chain, is now the world’s most expensive retail stock, following a bumper listing in March and steady gains thereafter. Analysts believe the company’s long-term growth story remains lucrative, and do not rule out a near-term pause in the stock’s rally.
On its stock market debut on 21 March, Avenue Supermarts shares rose 114.30% from its offer price, and has been gaining since. On Tuesday, it closed at Rs778.20, up 160.27% from the offer price. Its market capitalization now stands at Rs48,566.25 crore.
A day earlier, its stock had touched a record high of Rs806.80, achieving a market capitalization of Rs50,351.13 crore.
Avenue Supermarts is the most expensive retail stock among its global and regional peers, with price to earnings ratio for fiscal years 2018 and 2019 at 55.9 and 42.2 times respectively, said brokerage firm JP Morgan, which started covering the stock with a “neutral” rating on 7 April.
“We like the company’s execution capabilities, single format focus, sensible approach toward operating stores which offer healthy profit/return metrics, prudent store expansion strategy and strong focus on customer satisfaction,” JP Morgan analysts said in a note.
JP Morgan estimates 27% revenue and 34% earnings per share (compounded annual growth) over fiscal years 2017-20 driven by store additions, healthy same-store-sales growth, inflation and modest margin improvement.
It believes the premium valuations commanded by Avenue Supermarts are justified as it has almost 3-4 times EPS CAGR than the global/regional peers.
JP Morgan expects Avenue Supermarts to post an EPS CAGR of 28% over calendar years 2017-2019, and those of American peers Wal-Mart Stores Inc., which is the world’s largest retailer, and Costco Wholesale Corp., at around 7% and 11% respectively.
EPS is short for earnings per share and CAGR expands to compound annual growth rate.
JP Morgan also sees other Indian retailers Trent Ltd and V-Mart Retail Ltd posting EPS CAGR of 34% over the same period.
“We were expecting it to reach Rs660 in 18 months. It is already beyond that level. The company’s operations are the best in the sector,” said R. Sreesankar, head of research at Prabhudas Lilldher Pvt. Ltd. The brokerage started covering the stock on 21 March with a “buy” rating.
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“We think it is a good long-term story. Having said that, the short-term outperformance post-listing has been so strong, it will become expensive if the prices spike more,” added Sreesankar.
However, there is some discomfort with respect to valuation.
“The market cap of this company is around Rs50,000 crore. So, if they have 150 stores right now, the valuation would be valued at more than Rs300 crore per store,” said investment adviser Sandip Sabharwal, owner of asksandipsabharwal.com.
“One can buy an entire mall for that price (of one store),” added Sabharwal.
The supermarket chain, with a focus on value retailing, opened its first store in Mumbai in 2002, and had expanded to 118 outlets as of 31 January. Its net profit grew at a CAGR of 40.55% from fiscal 2014 to Rs318.76 crore in fiscal year 2016.