Graphic: Mint
Graphic: Mint

D-Mart: Good performance, but steep valuations

Will Avenue Supermarts be able to sustain margin expansion as it steadily competes in the segment to lure customers and build loyalty?

Avenue Supermarts Ltd, more well-known by its D-Mart supermarket chain, beat forecasts on all counts in the June quarter, boosting investor sentiment. The 39.4% surge in Ebitda (earnings before interest, tax, depreciation and amortization) to 423 crore when compared to the year-ago period was impressive. It was also way ahead of Bloomberg’s average forecast of a 27% growth.

Ebitda growth was clearly the result of the 27% bump-up in revenue, on the back of strong business. That apart, D-Mart had added 14 stores in the preceding March quarter, which would have accelerated growth too.

Importantly, the company scored on profitability too. Ebitda margin for the quarter rose by 90 basis points to 9.3%, while brokerage firms expected a flat performance. This was in spite of lower gross margins during the quarter, which in turn was the result of a conscious effort to bring down prices and offer customers value.

But that’s where the risk to future profitability lies. Will the company be able to sustain margin expansion as it steadily competes in the segment to lure customers and build loyalty? Some analysts reckon that over a period, it could impact profitability.

Fortunately, the company’s finance costs are contained so far. Hence, the strong revenue growth trickled all the way down to a 43% year-on-year growth in net profit.

To be sure, earnings growth is likely to support the stock price in the near term. However, at 1,593, the Avenue Supermarts stock trades at about 90 times the average earnings estimated for FY19—the steepest in the sector. This should cap upsides in the stock, even as investors must keep an eye on sustainability of margins, especially as the company gains size and scale is the key.

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