Home >Markets >Mark To Market >Avenue Supermarts’ covid-19 update is a reality check for fans of the stock

Shares of Avenue Supermarts Ltd, which runs the DMart chain of stores, have been among the more resilient ones in the past two months. Until 10 March, the stock had fallen only about 7% from its all-time highs in mid-February.

In that backdrop, the company’s announcement that nearly 50% of its stores are closed came as a nasty surprise for the Street. As a result, the stock fell by the maximum 5% limit for firms that aren’t permitted in the derivatives segment. Avenue Supermarts also said footfalls at stores that are open are significantly lower than usual, and sales of non-essentials have stopped.

Based on the above inputs, Prabhudas Lilladher Pvt. Ltd cut the retailer’s earnings per share estimates for FY21 and FY22 by 13.1% and 10.7%, respectively. It also pointed out that 90% of DMart store are present in the most-impacted clusters, and the spread of the virus can delay new store openings.

Share of the pie.
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Share of the pie.

For the nine months ended December 2019, general merchandise and apparel segment accounted for 29% of DMart’s revenues. The rest came from food and non-food (fast-moving consumer goods), which it continues to sell.

Varun Singh, analyst at IDBI Capital Markets and Securities Ltd, said: “Sales of general merchandise and apparel enjoys better gross profit margins of 25-30% compared to 10-15% in the grocery segment. This means the hit to profits will be higher than the impact on revenue from the discontinuation of their sales."

Still, there seems to be some respite. “For the time being we are clearly in an era where discounting has given way to availability of products. Consumers are focussing on lapping up essentially wherever and at whatever cost," wrote analysts at Edelweiss Securities Ltd in a report on Monday. “This means 7–10% discounting across products has now disappeared. It will aid topline (albeit for a short term) and, more so, gross margins."

In other words, this is a silver lining around a dark cloud at best.

Despite the huge impact of covid-19 on Avenue Supermarts, its stock continues to trade at more than 100 times trailing earnings. Like stocks of consumer goods companies, investors seem to be gravitating towards firms that are likely to be relatively less impacted.

The fact that Avenue Supermarts gets a majority of its revenue from the sale of products in the essentials category was thought to be a hedge. But as the company’s update shows, its operations have been hit badly due to the lockdown to contain the spread of the coronavirus pandemic. Valuations should ideally be far lower, although the lack of better alternatives may keep providing support to Avenue Supermarts’ lofty valuations.

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