Avenue Supermarts stock continues to be a hot favourite. Avenue runs the DMart chain of stores. The stock has risen as much as 110 percent from pre-pandemic highs in February 2020. In fact, in the past one month itself, the share has risen 35 percent.
The company is set to announce its September quarter (Q2FY22) results on Saturday (October 16). On October 2, DMart gave an update for Q2.
Standalone revenues for Avenue Supermarts have increased robustly by nearly 47 percent year-on-year (YoY) to Rs 7,650 crore, which is better than analysts’ estimates. On a two-year compound annual growth rate (CAGR) basis, revenues have increased by 13.4 percent.
As such, margin performance remains a key monitorable in the Q2 results. During the June quarter (Q1FY22), DMart’s gross margin had touched a multi-quarter low of 12.4 percent, representing a 129-basis point YoY drop. One basis point is one-hundredth of a percentage point.
Brokerages expect margins to rise
Further, earnings before interest, tax, depreciation and amortization (EBITDA) margin stood at 4.4 percent in Q1, which isn’t particularly inspiring, although the metric had expanded YoY, helped by a lower base.
Analysts expect margins to improve sequentially in Q2. According to Kotak Institutional Equities, “Gross margin will improve year-on-year due to relatively higher general merchandise sales and rising staples/FMCG product prices.” FMCG is an abbreviation for fast-moving consumer goods.
In its Q2 preview report, JM Financial Institutional Securities analysts said, “Expect (EBITDA) margin to get back to the 8-8.5 percent mark this quarter.” EBITDA margin in Q2FY21 stood at 6.2 percent.
Rise in share price raises valuation concern
The performance of DMart’s e-commerce business, along with management comments on the festive season, would also be worth tracking. Meanwhile, DMart’s total number of stores, as on September 30, stood at 246, implying an addition of eight new stores in Q2.
To be sure, the sharp rise of the DMart stock obviously means valuations are pricey. In a report on October 4, HSBC Securities and Capital Markets (India) analysts, said: “The key questions for investors are whether the valuation is ahead of fundamentals and whether there is a risk of de-rating.”
Based on HSBC’s estimates, the Avenue stock currently trades at 133 times estimated earnings for financial year 2023. The broker also added, “In our view, we are still midway in the evolving high-growth compounding construct. Investors should continue to stay positive on DMart.”
Even so, the stock’s sharp run-up may well limit meaningful upsides from a near-to-medium term perspective.
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