Mumbai: Investors expect the moon from DMart, a stock market darling. Since its listing in March 2017, DMart share prices are up a massive 372% from its issue price of 299 per share. Small wonder then that valuations are pricey. Currently, DMart shares trade at 63 times estimated earnings for fiscal 2020, based on Bloomberg data. But DMart’s high valuations could well get a reality check in the light of its disappointing September quarter profitability. DMart stores are owned and run by Avenue Supermarts Ltd, the quarterly financial results of which were released on Saturday.

At 10.14am, DMart shares traded 5.75% down at 1,329.65 per share on BSE. In intraday, the stock fell as much as 7.1% to 1,310 per share.

The company has taken price cuts and that’s reflected in its Ebitda margin and profitability. Ebitda margin declined by about 110 basis points to 8% compared to the figure last year. In the June quarter, DMart’s Ebitda margin was 9.3%, a number analysts went gaga about. Typically, margins of the grocery business are thin as the business climate is hypercompetitive. The company’s focus is also on revenue growth rather than margin expansion, pointed out analysts from Edelweiss Securities Ltd in a report on 13 October.

Ebitda is short for earnings before interest, tax, depreciation and amortization.

100 basis points equal one percentage point.

DMart’s Q2 Ebitda came in at 390 crore, representing a growth of 23% from the figure a year earlier, far slower than revenue growth. Kotak Institutional Equities and Jefferies India Pvt. Ltd were expecting DMart to eke out an Ebitda of 448 crore and 405.5 crore, respectively.

DMart’s net profit increased by 18%—an even slower pace than its Ebitda growth—to 226 crore. Net profit growth was impacted mainly on account of decline in other income.

However, revenue performance was better than expectations. Revenue increased by an impressive 39% over the same period last year to 4,872 crore. What helped?

In the Q2 results press statement, Avenue Supermarts’s chief executive and managing director Neville Noronha said: “During the quarter we continued to bring prices down for our customers across categories. Our revenue growth in Q2 is a reflection of those price cuts."

“Management’s increasing focus on sales growth comes in light of increasing competitive intensity from Big Bazaar, Reliance Retail, BigBasket, and Walmart-Flipkart deal, among others," pointed out Edelweiss analysts.

Meanwhile, store addition wasn’t particularly exciting. The company added three stores in Q2 and five for the six months ended 30 September. This takes the total store count to 160 at the end of the last quarter. For investors, store addition is a key parameter to track.

What next?

Analysts are likely to clip their earnings estimates after DMart’s Q2 results. Edelweiss lowered its fiscal 2020 (estimated) enterprise value/Ebitda from 45 times to 35 times to factor in increasing competition and arrive at a revised target price of 1,274 (earlier 1,726).

Edelweiss said it was downgrading the stock to “Reduce" from a “Hold" rating.

So far this fiscal, DMart shares have outperformed the S&P BSE 100 index. How margins shape up after the September quarter performance remains a key factor to watch out for.

DMart enjoys a scarcity premium and that augurs well for investors. However, valuations seem to be baking in all the positives and in the near term, the Q2 results could well be a reality check on the optimism.

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