Investors cheered Avenue Supermarts Ltd’s December quarter earnings, announced on Saturday, with the stock gaining 2% on the National Stock Exchange on Monday.
The company, which runs the DMart supermarket stores, said revenue increased by nearly 24% to ₹6,752 crore from a year earlier.
The growth was led by store additions, with analysts at JM Financial Institutional Securities Ltd estimating revenue per store growth at 4% in the December quarter.
Avenue Supermarts added seven stores in the quarter, taking the total additions in FY20 to 20. In comparison, nine stores were added in the nine months ended December 2018.
The 24% revenue growth is nothing to sneeze at, especially at a time when consumer demand sentiment is muted in the country. With the company gaining scale, growth rates are bound to taper. For instance, revenue growth for the December 2018quarter stood at a more robust 33%.
JM Financial’s analysts pointed out that revenue per square feet (sq. ft) was, in fact, down 4% from a year ago. However, this was because of the company’s strategy of opening relatively larger stores (55,000 sq. ft for stores opened so far this year, compared to an average of 35,000-36,000 sq. ft per store earlier).
The gross profit margin expanded slightly for the December quarter. Revision in corporate tax rates also boosted net profit, which increased by 53% to ₹394 crore.
Investors can hardly complain. After underperforming the Nifty 100 index in the initial months of FY20, the Avenue Supermarts stock later outperformed the broader index. It has appreciated almost 30% so far in FY20 and trades at about 69 times estimated earnings for FY21, based on Bloomberg data.
This is not surprising as the valuation of the company was always high.
“Its consistent superlative performance has ensured strong valuation re-rating in the last three years since its listing and resulted in massive outperformance versus market and other retail peers," wrote analysts at Motilal Oswal Financial Services Ltd in a report on 13 January.
However, the outlook isn’t as bright as the company’s valuations suggest.
“Therefore, the relative moderation in revenue growth coupled with high capex (capital expenditure) could impact Avenue Supermarts’ return ratios and could compress valuation multiples in our view, despite its continued stellar relative earnings outperformance," said the brokerage firm.
Store additions will aid revenue growth from a long-term perspective. Here, Avenue Supermarts’ investors would do well to follow the revenue per sq. ft metric. How competitive intensity shapes up is also a key factor to monitor.