Mumbai: JM Financial Institutional Securities Ltd said on Monday it is initiating coverage on Avenue Supermarts Ltd, the parent of supermarket chain D-Mart, with a buy rating as it sees 28% upside in the stock.
In reaction, Avenue Supermarts shares rose 2.42% at Rs1,359.15 on the BSE at 11.40am, while benchmark 30-share Sensex traded 0.43% higher at 33,109.45 points. JM’s target price is set at Rs1,675 per share.
In a report titled “BUY, and don’t sell if it ain’t broke", JM analysts argued that the attractiveness of DMart’s operating model stems from the significantly higher level of throughput that its stores generate, which is nearly 2-3 times what other retailers clock on an average.
They added that this helps justify its choice of owning the stores (including the cost of land on which they are built), and the discounts that it pampers its shoppers with—the latter being one of the key drivers of footfalls and conversions for DMart,
JM Financial analysts Richard Liu and Vicky Punjabi compared the potential of an investment in D’mart’s shares to that made in Titan Ltd 10-11 years ago when it was trading at 42 times its then 5-year average price-earnings (PE) ratio, which is currently around 20 times and has still made a return of 25% per annum on the stock.
Notably, even if the stock was bought at a 100 times forward PE around 10-11 years ago, the return would still have been 15.6% per annum, they said, adding that an above-average EPS (earnings per share) CAGR (compounded annual growth rate) of 23.4% over the last 10 years is what drove Titan’s strong stock performance notwithstanding its rich valuation.
“We see a similar growth trajectory panning out for DMart, which, as per our workings, is well-poised to compound earnings at 25% p.a. over the next 10 years," they added.
Currently, Avenue Supermart shares have four buy/outperform ratings, one hold rating, while seven analysts recommend a sell/underperform on the stock.