Home >Market >Mark-to-market >D-Mart Q2 earnings don’t support valuations, but who cares?

Avenue Supermarts Ltd’s September quarter results weren’t particularly spectacular.

The imposition of the goods and services tax (GST) has impacted revenue growth. Year-on-year revenue growth was 26%, lower than the 35.7% growth in the June quarter. Operating profit was more or less in line with analysts’ estimates, while net profit grew by 65%, thanks to a jump in other income and a drop in interest costs.

But note that the company’s shares trade at an absurd 101 times estimated earnings for this fiscal year, based on data collated by Bloomberg. Earnings growth is nowhere near enough to justify this sort of valuation and, more importantly, the drop in revenue growth is a tad disconcerting.

But none of this will bother investors, given the current mood in the markets.

Besides, D-Mart enjoys a so-called scarcity premium.

On revenue growth, the company has said the imposition of GST has skewed the picture to an extent.

“On a comparable basis, revenue growth for the September quarter is 31%," said Neville Noronha, chief executive officer and managing director, Avenue Supermarts. While that’s comforting, it is still lower, compared with the June quarter.

On the flip side, disruptions owing to GST implementation in the unorganized sector meant that some of that business came to D-Mart during the quarter, enabling it to improve its product mix and sell more of high margin products.

D-Mart’s Ebitda margin of 9% in the September quarter represents a consistent improvement in the measure since the March quarter. Still, D-Mart’s Ebitda of Rs318 crore is more or less in line with the Street’s estimates—analysts at Kotak Institutional Equities, for instance, were expecting an Ebitda of Rs319 crore.

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

Net profit was boosted, thanks to the inflow of initial public offer, or IPO, proceeds earlier this year.

Interest income rose, with a chunk of the money parked in fixed deposits.

Secondly, finance costs fell by about two-thirds as the company utilized a portion of its IPO proceeds to pay off some proportion of its debt.

Comparatively, net profit growth in the June quarter and the March quarter was around 45%.

While that appears like a remarkable improvement, investors would do well to watch for the impact of GST on profit margins in the coming quarters.

Additionally, as the company grows, revenue growth is likely to taper down, considering mature stores aren’t going to grow at a faster pace.

However, as pointed earlier, these factors are unlikely to hinder investor confidence in the D-Mart story, given the relatively superior performance metrics and the lack of meaningful options in the retail sector.

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