Home >Market >Mark-to-market >Chinks in D-Mart’s armour?

Not all of popular supermarket chain D-Mart’s operating parameters for financial year 2018 will enthuse investors. Take like-for-like (LFL) growth, for instance. For fiscal 2018, the measure has dropped to 14.2%, the lowest in the last five years (the chart has details).

D-Mart is run by Avenue Supermarts Ltd. LFL growth means revenue growth from sales of same stores which have been operational for at least 24 months at the end of a fiscal.

Neville Noronha, CEO and managing director, Avenue Supermarts, says adjusting for the taxation impact (introduction of the goods and services tax), there is an adverse impact of 2.2% on LFL growth. Even so, FY18 LFL growth is relatively lukewarm.

Further, store additions in FY18 at 24 stores, the highest additions in the last five years, are below D-Mart’s own expectations. Noronha had said earlier there was opportunity for them to at least reach 30 per annum. “We aren’t getting appropriate properties because of the model we are in," said Noronha after its March quarter and FY18 results were published on the stock exchanges on Saturday. The company typically likes to own its properties but is now open to leasing as well to accelerate the pace of store additions. As on 31 March, D-Mart had 155 stores.

As for the March quarter results, net profit growth of 73% year-on-year is impressive to say the least, helped primarily by interest cost savings. Finance costs declined 57% during the quarter. Proceeds from its initial share sale in March 2017 were used to pay off some its debt, which dropped to Rs439 crore at the end of FY18 from Rs1481 crore at FY17-end. Debt-to-equity at 0.09 times is benign.

Nevertheless, March quarter Ebitda at Rs295 crore missed Street expectations. Kotak Institutional Equities and IIFL Institutional Equities were expecting last quarter Ebitda at Rs336 crore and Rs347 crore, respectively.

Will investors punish the stock with gusto after the results? Not really. As one analyst says, “It is true that the stock is pricing in lofty expectations and the company has missed a bit but where are you getting retail companies that are growing profits at this pace?" That pretty much sums up the mood for D-Mart.

D-Mart shares have gone up an eye-popping 400% from its issue price of Rs299 in nearly 14 months since its listing on 21 March last year. Analysts expect the company to eke out earnings per share of about Rs17 for the current fiscal year. That translates into a stratospheric price-to-earnings ratio of about 88 times. Still, as seen previously, the D-Mart stock will continue to enjoy the scarcity premium. Improving product mix should support revenues. But with valuations so high, investors must keep a close eye on sales growth.

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