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Home >Markets >Mark To Market >DMart's stock bears the brunt of rising covid cases, but valuations still pricey

Shares of Avenue Supermarts Ltd have declined by 13% after touching their highest ever levels this year on 5 March. In comparison, the Nifty 100 index has corrected by just 2.6%. Avenue runs the DMart chain of retail stores.

What explains the underperformance? Well, for one, covid-19 cases are soaring and that’s a threat to the grocery retailer. As Anand Shah, consumer analyst at Axis Capital Ltd, said, “For Avenue Supermarts, rising covid-19 cases pose risks to recovery. Note that Maharashtra is witnessing a large spike in new infections and the state remains a big market for the company.

Rising cases will mean a lot of people will avoid crowded places and that poses a risk to footfalls. Investors are likely to get jittery."

Good time ahead
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Good time ahead

Maharashtra is the biggest market for Avenue.

Separately, investors should note that the recent decline doesn’t bring much respite on the valuations front. Based on one-year forward earnings estimates of JM Financial Institutional Securities, the Avenue stock trades at 88 times estimated earnings for financial year 2022. The only consolation is that valuations are slightly lower than pre-covid highs.

The Avenue stock was trading at 98 times forward earnings at the pre-covid peak in February 2020, using JM’s estimates at the time.

DMart’s Q3 results showed the firm has been on a quick road to recovery. Standalone revenues grew 10% year-on-year, and earnings before interest, taxes, depreciation and amortization (Ebitda) margin of 9.3% was higher than pre-pandemic levels.

In general, going ahead, investors will watch the progress on Avenue’s e-commerce business, where there is formidable competition now. Faster pace of vaccination is helpful too, and should limit the damage from the rise in cases. From a near-term perspective, recovery trends in the March quarter would be crucial to follow.

To be sure, despite near-term hurdles and the high valuations, there is no dearth of believers in the company’s long-term prospects. In a report on 18 March, analysts from IDBI Capital Markets & Securities Ltd studied Walmart Inc.’s evolution over the years and evaluated the opportunities for Avenue.

“Where DMart stands today (with 229 stores), Walmart was at the same place in 1979 (229 stores). Walmart has been able to grow revenue at 33% CAGR during 1979-1995 (17 years). Given India enjoys a population of 4 times more than US, our assumption of DMart’s ability to grow revenue at 28% CAGR over next 25 years is conservative," pointed out the IDBI Capital report. CAGR is compound annual growth rate.

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