Apr 07, 2017 03:22 PM IST | Source:

D-Mart operator up 12% on CRISIL upgrade; JPMorgan initiates coverage with neutral

JP Morgan has initiated coverage on the stock with a neutral rating and CRISIL upgraded rating on bank facilities

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The stock price of Avenue Supermarts (ASL), the operator of retail chain D-Mart, touched a record high of Rs 746, up 12.4 percent intraday Friday after JP Morgan has initiated coverage on the stock with a neutral rating and CRISIL upgraded rating on bank facilities.

ASL, with a strong execution track record, is a quality play on the Indian F&G retail sector, being the fastest-growing and most profitable retailer, says the brokerage house which expects 27/34 percent revenue/EPS CAGR over FY17-20.

Food retailing is about format and execution and according to the brokerage house, ASL has been able to achieve this combination well. It likes ASL's execution capabilities, single format focus, best-in-class productivity metrics (sales densities around 2-3x peers), prudent store expansion strategy and strong focus on customer satisfaction partly aided by its 'everyday low price' positioning.

Despite its capital-intensive strategy of ownership (against renting), its asset turns are similar to peers. JP Morgan believes it is a relatively "safe" play on India's consumption growth story, given the non-cyclical nature of the food retail business.

Despite low gross margins (owing to low price positioning), ASL has amongst the highest EBITDA margins (against peers) owing to tight control on operational costs (employee, selling, general & administration) and high sales comps, the research house says.

"Significant headroom to gain share with prudent store expansion (around 2.1 million sq ft over FY18-20); sustaining healthy average same-store-sales growhth momentum at around 18 percent over FY17-20 (against 25 percent over FY12-16); scope for margin improvement exists with scale benefits, though we build stable margins; and private label growth and contribution from online over the medium term," would be growth drivers, JP Morgan says in its research note.

Post the bumper listing (more than 120 percent above offer price), valuations at 55x/42x FY18/19 P/E leave little room for disappointment, it thinks. Hence, it set a target price on the stock at Rs 635 for March 2018, which is far lower than current stock price.

E-Commerce threat – upside risk to investments in the online channel (global retailers have already witnessed margin erosion with higher E-commerce outlays); high capex intensity; and slower-than-expected network expansion and/or tepid same-store-sales growth could be risks, it feels.

Meanwhile, credit rating agency CRISIL has upgraded its rating on the long term bank facilities and non-convertible debentures of the company to AA/stable from AA-/positive.

At 14:40 hours IST, the stock was quoting at Rs 742.25, up Rs 78.30, or 11.79 percent amid high volumes on the BSE.

Posted by Sunil Shankar Matkar
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