PremiumAvenue Supermarts Ltd, which runs the DMart chain of retail stores, is on the road to normalcy faster than anticipated. The December quarter (Q3FY21) results, announced on Saturday, with standalone revenue growth at 10% year-on-year, are testimony to that. This marks a reversal from the declining trend seen in Q1 and Q2 and by a wide margin at that. Moreover, it also looks good considering that the Q2 results fell short of expectations.
Investors cheered. On Monday, Avenue’s shares hit a new 52-week high on the NSE.
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Another bright spot is the expansion in earnings before interest, taxes, depreciation and amortization (Ebitda) margin of 52 basis points vis-à-vis last year. One basis point is one-hundredth of a percentage point.
“Margin for Q3 at 9.3% is as normal as it could get," said analysts from JM Financial Institutional Securities Ltd in a 9 January report. “Margins for two quarters pre-pandemic were at 8.7-8.8% despite more than 20% sales growth during those periods."
According to JM Financial, there are possibly two factors that drove this: lower level of discounting on FMCG products and significantly lower overhead costs. FMCG is fast-moving consumer goods.
According to Avenue, agile operational expenses management along with a good surge in festival shopping helped in the December quarter.
In Q2 and Q1, Ebitda margin had understandably contracted and stood at 6.2% and 2.8%, respectively.
In the December quarter, Avenue soft-launched its e-commerce operations in select pin codes in three cities. Analysts, however, expect DMart to ramp up e-commerce gradually.
So far so good. And here’s when investors should start becoming cautious. One, the road ahead has some speed bumps. Two, Avenue’s shares remain expensive. While the festive season helped Avenue’s Q3, the company said December didn’t trend as well as the festival months of October and November. “A slowdown in performance in December (due to weak demand and store operation restrictions, in our view) means that complete recovery and return to the historical growth trajectory could still be some time away," said ICICI Securities Ltd analysts in a 10 January note.
For perspective, in FY20 and FY19, Avenue’s revenues grew nearly 24% and 33%, respectively, year-on-year. Additionally, increasing raw material prices and inconsistent supplies from the non-FMCG sector pose a risk to near-term margins.
In general, strong momentum from online retailers in a post-covid world remains a looming threat.
Lastly, Avenue’s valuations are pricey. The stock trades at about 98 times FY22 estimated earnings, based on Bloomberg data. So, meaningful upsides will be tough hereon. “Valuation is stretched even after cognizing for DMart’s hyper-growth characteristics," points out JM Financial.
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