Brokerages see more pain for D-Mart, signal avoiding it

"Overall revenue grew by 23 percent during the March quarter, however during March month 2020 it grew by just 11 percent over March 2019 due to the lockdown effect of the last 9 days of March this year," Neville
Noronha, CEO & Managing Director said.

"Margins have also seen erosion as regulations did not permit us to sell any apparel and general merchandise products," he added.

On the operating front, there was a mixed picture. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 12.1 percent year-on-year to Rs 417.33 crore in March quarter, but margin contracted to 6.67 percent in Q4FY20, against 7.35 percent reported in March quarter 2019.

Read more: D-Mart operator's Q4 profit jumps 42% to Rs 271 crore, but margins contract

Brokerages keep negative views

The near-term outlook for the company, at this juncture, looks gloomy. Most brokerages have come out with 'sell' or 'reduce' ratings on the stock. A few have retained a 'neutral' view.

The company has witnessed a 45 percent decline in its April revenue, as more than half of its stores remained closed during the lockdown.

Even after the lockdown ends, there are apprehensions that there may be a shift in consumer behaviour in terms of spending. If the apprehensions turn into reality, stress for D-Mart will accentuate.

Credit Suisse

Global brokerage firm Credit Suisse has a 'neutral' rating on the stock with a target price of Rs 2,150.

Credit Suisse has cut the company's earnings estimates by 3-9 percent.

Kotak Institutional Equities

Kotak Institutional Equities has a 'sell' call on the stock with a target price of Rs 1,480.

The brokerage said while revenue growth at 23 percent and rise in profit at 41 percent YoY was below estimates, store addition of 18 exceeded expectations.

Kotak, too, has revised down FY21 EPS estimate by 8 percent. However, it expects normal operations FY22 onwards.

Motilal Oswal

Motilal Oswal Financial Services has maintained a 'sell' call on D-Mart with a target price of Rs 1,900 and said retail companies are expected to see revenue erosion.

We cut our FY21 EBITDA by 17 percent but retain our estimates for FY22. We raise our target multiple on EV/EBITDA to 40 times from 35 times and arrive at a target price of Rs 1,900 from the current price, which still implies a 21 percent downside," said Motilal.

HDFC Securities

The brokerage has a 'sell' call on the stock with a target price of Rs 1,750.

The brokerage expects D-Mart's gross margin and EBITDA margin to remain under pressure as the essentials remain high in revenue mix till June-end.

"To add to the woes, D-Mart may also have to contend with the rising cost of retailing as contract labour comes at a premium and lower margin D-Mart Ready sales may inch up during the pandemic," HDFC Securities said.

It has cut D-Mart's FY21 EPS by 11 percent to factor in lower gross margins.

ICICI Securities

The brokerage has downgraded D-Mart to a 'reduce' from a 'hold' and cut the target price to Rs 2,200 from Rs 2,300.

"We cut earnings estimates by 7-14 percent to reflect greater than-expected margin impact; modelling revenue/EBITDA/PAT CAGR of 25 percent/29 percent/32 percent over FY20-22E. At our target price, the stock will trade at 60 times P/E March 22E," ICICI said.

The brokerage said key upside risks for D-Mart are fast turnaround of e-commerce operations and faster-than-expected recovery.

IDBI Capital

IDBI Capital, too, has downgraded the stock to a 'reduce' and cut the target price to Rs 2,076 from Rs 2,139.

"Recovery in revenue during the first two weeks of May 2020 is encouraging but significantly below normal levels. We believe, FY21E will be very challenging for D-Mart in terms of business-recovery in brick and mortar stores due to social-distancing and restricted store opening timings," IDBI said.

Crumbling walls?

It will be an exaggeration if Avenue Supermarts is termed as the story of the past. The company has the ability to come back strongly, surprise the Street and make analysts and investors rethink their strategies on it.

Motilal Oswal is of the view while Q1FY21 could be a washout, D-Mart could see recovery sooner than other retailers as nondiscretionary revenue contributes 72 percent to the total revenue," said Motilal.

Motilal highlighted that the company had raised Rs 4,000 crore through QIP in Q4FY20, which has strengthened the balance sheet and helped it reach the current net cash position. This has enhanced its liquidity position in these uncertain times.

"D-Mart is well-positioned in terms of both business model and balance sheet to recover from the ongoing turmoil in the economic environment. This is as it caters to a large proportion of low-ticket items and has a strong balance sheet," said Motilal.

Besides, the fear of a shift in consumer behaviour in the post-coronavirus era seems to be overdone.

Ridham Desai, Managing Director at Morgan Stanley India in a chat with CNBC-TV18 said India has come away relatively unscathed by COVID-19. So, it is unlikely that there will be a permanent shift in consumer behaviour.

"A lot of the businesses that have been affected by the lockdown and social distancing will come back. I think consumer behaviour will revert to the way it was. A permanent shift in behaviour is unlikely. I do not see disruption caused by COVID-19 persisting more than 6-12 months," Desai said.

D-Mart is going to have a tough time in the near-term due to disruption caused by COVID-19, but it makes little sense to write off the company's long-term story. From the second half of FY21, the company is expected to see normalcy coming gradually.

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