Why top MFs invested over Rs 1,000 cr in D-Mart operator Avenue Supermarts
Investors with a 2-3 years horizon should consider investment in the stock on corrections of up to 100-150 points.
The listing of Avenue Supermarts, the parent of retailer D-Mart, last month created only history since the time it got listed on the bourses last month. The stock more than doubled investors’ wealth on the listing day itself.
The stock, which saw huge interest from retail investors, became one of the top stocks which was added by almost 15 asset management companies (AMCs) in their portfolio in the month of March with a market value of Rs 1,000 crore.
HDFC Asset Management Company picked up 88 lakh shares amounting to over Rs 500 crore, followed by ICICI Prudential Asset Management Company which bought 33 lakh shares amounting to Rs 212 crore, according to data compiled by IDBI Capital.
Avenue Supermarts, which is known for running D-Mart supermarket chains is known as the most profitable store in India. ASL has a successful business model of Greenfield stores where the land is purchased by the company where they construct their own stores.
The company also follows cluster base approach where they open stores in states like Maharashtra and Gujarat and intends to open in the states of Andhra Pradesh, Telangana, Madhya Pradesh, Karnataka, Chhattisgarh, Tamil Nadu and northern India.
“D-Mart is the most profitable retail chain in India and also possesses huge competition to its peers nationally,” Foram Parekh, Research analyst, Bonanza Portfolio Ltd told moneycontrol.
ASL has consistently posted a double-digit return on equity (ROE) whereby in FY16 it posted a highest ROE of 23.4 percent compared to Wal-Mart’s ROE of 18.15 percent in CY16 and far ahead of its other global peers.
It is justified for Avenue Supermart to enjoy premium valuations given the longevity of the business is intact, but it leaves little room for margin of error, say experts.
While Avenue Supermarts is on a stronger growth trajectory vis-à-vis its global counterparts like WalMart (-5 percent PAT CAGR over last 5-years) or Costco (4 percent PAT CAGR over last 5-years), D-Mart’s valuation at 50x FY19E earnings already reflects the same and is at a substantial premium to its global peers (15-30x).
“The valuation of Avenue Supermart at over 50x FY19E, despite factoring in a 35-40 percent growth in Net Profit over the next couple of years, clearly leaves little scope for margin of error for the company in terms of delivering growth,” Hitesh Agrawal, EVP & Head – Retail Research, Religare Securities Ltd told moneycontrol.
“The street has built in huge expectations, which is reflected in the rich valuations that the stock currently commands. D-Mart is a good proxy play on India’s strong consumption theme,” he said.
What should investors do?
Investors with a 2-3 years horizon should consider investment in the stock on corrections of up to 100-150 points. The stock is trading near unprecedented valuation and investors should be very cautious at these levels, particularly those who entered at very high levels.
“Investors who entered at IPO stage should remain invested as the quality of this stock is really high and the growth story is likely to continue. However those invested at overstretched levels should watch cautiously,” Prakarsh Gagdani, CEO, 5Paisa.com, (an IIFL subsidiary) told Moneycontrol.com.
If an investor has a short-term view, then the stock movement could be quite volatile depending upon the movement in the broader market, as there is little by way of valuation comfort, which can provide a cushion to the stock, suggest experts.
“From a 2-3 years perspective, and considering the growth prospects of the company, the stock can be accumulated on corrections in one’s medium-to-long-term portfolios, considering that D-Mart is a good proxy play on India’s strong consumption theme,” said Agrawal.
Although D-Mart being one of the most profitable stores in India and commands one of the highest profitability ratios in the world, analysts’ feel the stock at the current market price has priced in all the positive factors of continuous high growth, geographical expansion, scalability and sustainability of the business.
“We feel D-Mart will continue to outperform the industry at whole in terms of margins and profitability due to its unique business model of owning its properties and cluster-based approach, but we feel at current MCAP of Rs 50k crore the stock has priced in multi-year growth story and might not give attractive returns from CMP,” said Parekh of Bonanza Portfolio Ltd.
The stock has rallied over 100 percent in a span of less than a month, which has been the fastest rally in the history; hence, a correction could be due on the cards, as the 30-day lock-in period for anchor investors ended on April 17.
“We feel long-term investors should book partial profits and short-term investors should look to completely exit the stock and should avoid buying at CMP and should wait for healthy correction of 100-150 points for valuations to look attractive,” added Parekh of Bonanza.