Shares of Avenue, which runs the DMart supermarket chain, now trade 116 times the FY20 earnings
Even as March quarter results have been robust despite the covid-19 disruption, management commentary on the near future is cautious and that could well cap the gains in the stock, going ahead
Avenue Supermarts Ltd’s lofty valuations suggest investors expect the moon from the retailer. Avenue runs the DMart supermarket chain of stores. Avenue’s shares now trade at a whopping 116 times financial year 2020 earnings. In fact, the stock is about 6% away from its 52 week trading high seen in February on the NSE, indicating high investor optimism.
While the company’s March quarter results announced on Saturday are nothing to complain about in covid-19 times, management commentary on the near future is cautious and that could well cap the gains in the stock.
Note that the company’s revenues in April fell more than 45% year-on-year. Besides, profits took an additional hit because sales of higher-margin apparel and general merchandise products were disallowed.
For financial year 2020, share of apparel and general merchandise products in revenue stood at 27.31%. Foods and non-foods (FMCG) contribute Avenue’s remaining revenues at 52.40% and 20.29% share, respectively.
There has been some improvement in May for DMart, in terms of operating stores and overall revenues. However, risks persist. “Absenteeism of staff due to covid-19 fear is a major cause of concern," said IDBI Capital Markets & Securities Ltd analysts in a report on 24 May.
Nevertheless, it’s difficult to ignore that Avenue is relatively better placed. “We argue DMart has an edge against other retailers, not to mention its strong liquidity (about Rs3400 crore in cash & equivalents), that should help it weather business loss," pointed out an Edelweiss Securities Ltd report on 23 May.
Coming back to the March quarter, Avenue’s revenues increased 23% year-on-year. Earnings before interest, tax, depreciation and amortisation (Ebitda) margin declined over 100 basis points on a like to like, according to analysts. One basis point is one-hundredth of a percentage point.
The company added 18 stores last quarter and 38 for FY20, taking the store count to 214. This year, new store additions could well be slower as construction activity takes time to pick up.
“We believe, FY21 will be very challenging for DMart in terms of business-recovery in brick and mortar stores due to social-distancing and restricted store opening timings," reckons IDBI Capital. The brokerage firm has downgraded the stock’s rating to ‘reduce.’