Scarcity premium is holding up DMart, but for how long?

Avenue added 17 stores in the December quarter, taking the total store count to 263.
Avenue added 17 stores in the December quarter, taking the total store count to 263.


  • Avenue stock trades at about 115x and 88x estimated earnings for FY23 and FY24, respectively
  • Standalone revenue in the December quarter grew 22% from a year earlier

Avenue Supermarts Ltd’s shares are down about 20% from their 52-week high of 5,900 in October on the National Stock Exchange. Avenue runs the DMart chain of retail stores. Analysts point out that the stock’s exorbitant valuations are one factor responsible for the correction.

But this doesn’t mean valuations offer comfort even now. Bloomberg data shows the Avenue stock trades at about 115 times and 88 times estimated earnings for FY23 and FY24, respectively. Further, EV/Ebitda is about 75 times for FY23 estimates, according to Bloomberg. EV is enterprise value. Ebitda stands for earnings before interest, taxes, depreciation, and amortization.

Recovery path
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Recovery path

Avenue’s shares fell by 2% on Monday, a day when the Nifty50 index rose by 1%. December quarter earnings announced on Saturday show revenue performance has not been particularly impressive.

Standalone revenue in the December quarter grew 22% from a year earlier. This translates into a two-year compounded annual growth rate (CAGR) of 16% versus the third quarter of FY20, a pre-pandemic quarter. “We view this as underwhelming given the high price inflation and the fact that many FMCG companies are also reporting double-digit two-year revenue CAGR," said analysts from Credit Suisse Securities (India) Pvt. Ltd, in a report on 10 January. The analysts added, “The other factor to take into account is that Avenue has added retail space of 47% over two years, and the total revenue growth is much lower at 34% compared with the total retail space addition."

Note that Q3 broadly had minimal pandemic-led restrictions. Avenue’s recovery on revenue per store basis was discouraging, too, with year-on-year growth at 5.7%. “A mere 1.6% sales growth versus two-year ago level was disappointing. To put in context, store revenue used to grow 8-9% per annum on an average before the pandemic," said JM Financial Institutional Securities Ltd’s analysts.

According to Avenue, “General merchandise and apparel business is consistently seeing relatively less sales contribution while essentials and FMCG are doing better. Inflation and limited opportunity to go out are negatively impacting certain categories more than others."

According to the company, the deteriorating mix has weighed on gross margins, which contracted by 22 basis points (bps) year-on-year to 14.9%. One basis point is 0.01%. However, Ebitda margin expanded by 28bps to 9.6%, helped by better cost efficiencies. In fact, this also reflects in Avenue’s better performance on the Ebitda per store basis.

Avenue added 17 stores in the December quarter, taking the total store count to 263. From a near-term perspective, rising covid cases and potential local restrictions pose a threat, as footfall can take a beating, in turn, impacting revenues. “Given the resurgence in covid, we cut our estimates for the March quarter, which leads to a 9% downgrade to our FY22 earnings per share (EPS) estimate. Cuts to FY23/24 EPS are lower at 3-6% as we build ramp-up, following the normalization," said analysts from Jefferies India Pvt. Ltd. The brokerage has maintained its underperform rating on the stock, given steep valuations and sharp rerating seen in the past year.

As such, Avenue’s higher valuations are a cause for concern for many analysts. Even so, the stock enjoys a scarcity premium, which offers some support to valuations. That said, rich valuations of the Avenue stock may limit significant upsides in the near future. Going ahead, investors would do well to track growth performance of Avenue’s online grocery retail business, DMart Ready. Overall, higher competition from Amazon and Reliance Retail, whose pockets are deep, is a risk factor to watch out for.

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