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D Mart: Why India's most expensive retail stock is still priced at a premium

Valuations seem stretched, but lower-than-expected growth momentum in future could give investors some room to identify price corrections before clicking the ‘Buy’ button.

January 31, 2018 / 03:27 PM IST
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Krishna KarwaMoneycontrol Research

In a quarter marred by de-stocking and subdued consumer sentiment, Avenue Supermarts-owned D Mart stood tall with its impressive quarterly numbers. Existing investors have reasons to cheer since one more quarter went by without any negative surprise. Those waiting for an entry opportunity may not get it just yet. It remains to be seen how long D Mart justifies the premium valuation.

An overwhelming IPO oversubscription, followed by a stellar listing at the bourses, set the performance bar high for Avenue Supermarts Ltd (ASL), India's most expensive retail stock. Quite a few investors subsequently kept a close watch on the performance. So, what does it reveal this quarter?

Quarterly Result SummaryExhibits_240720175623

As seen in the exhibit above, justifying all the hype, ASL’s fundamentals have been steadily growing and the company appears to have successfully deployed most of the IPO funds. In the March-June 2017 period, the company managed to retire debt worth Rs 864 crore (80 percent) out of the originally planned amount of Rs 1080 crore, thereby resulting in a noticeable decline in financing costs.

Moreover, Rs 366.6 crore, constituting nearly 20 percent of the IPO proceeds of Rs 1,870 crore, earmarked for store expansion, has not been expended yet by the company.

Evidently, a significant degree of the sequential top-line growth, prima facie, can be attributed to the company’s ability to effectively capitalize on its existing distribution network, in addition to an improved ramp-up of the new stores opened in the past year. The impressive sales performance had a positive rub-off on the margins as well.

Growth Strategy Intact

After setting up new stores in four new states/regions in FY17 (Daman, NCR, Rajasthan, Tamil Nadu), ASL opened a new store in Punjab in Q1FY18, a state where it didn’t have any presence in the past. The company aims to gradually expand its retail operations pan-India by adding around 25 stores every year, with most of the additions taking place in the final quarter of the fiscal.

Since GST implementation is already underway, ASL’s management team envisages that barring certain product categories, which may witness a minor blip in supply from vendors till the end of July 2017, most of the inventory management/clearance issues have been sorted. Therefore, the new indirect tax regime should not cause any material earnings disruption in the upcoming quarters.

What Should Investors Do?

ASL’s turnover trajectory is likely to strengthen further on the back of new stores being added during the current fiscal. However, it remains to be seen if the exceptional track record can translate into robust results as the company scales up.

Numerous dynamics such as product mix, store cost capitalization, asset turnover, terms of procurement from manufacturers, among others, will play a key role in India's retail space going forward. Since a dramatic increase in the non-operating income from a sequential and year on year perspective influenced the company’s financial performance for the quarter gone by considerably, any major reduction on this front may impact the profit after tax margins.

While there is no denying the fact that ASL’s business model of providing everyday consumption products at affordable prices is strong, at 60.5x FY19 estimated earnings, the company, undoubtedly, is priced to perfection.


Despite being confident about ASL's execution capabilities, we do not expect multiple re-rating. Nonetheless, the stock may continue to reward investors with an upside that matches growth. Except for an earnings disappointment-led price correction, those who haven't added D Mart to their shopping cart should continue to monitor future results.

Krishna Karwa is Senior Analyst, iFast Research