Avenue Supermart, which runs the DMart supermarkets chain, has strong potential to create long-term wealth on top of its spectacular rise in the last four years, but it is vulnerable to volatility as seen this month when it touched its 52-week high on March 5 but fell 15 percent in the next three weeks.
The company, backed by Radhakishan Damani, one of India’s richest men, has made strong gains so far. Shares more than doubled on the listing day four years ago, and has grown 800 percent from its issue price of Rs 299. It was listed at Rs 604 on March 21, 2017.
Experts say DMart has the potential to deliver 20 percent CAGR on its earnings for two decades, giving a good opportunity for long-term wealth creation to investors who missed the initial rally.
“We believe, DMart stock is a 100 bagger, even from the current price, over the next 25years. This company has the potential of compounding EPS at +28 percent CAGR over FY21-46E,” IDBI Capital said in a report.
“We see DMart as a high conviction BUY idea. We upgrade our valuation multiple to 60x EV/EBITDA as we expect DMart to grow at a higher rate for a longer period of time,” it said. The revised 12-month target price stands at Rs 3,699 which translates into an upside of about 30 percent from March 26 closing of Rs 2854.
D’Mart had traded at a multiple of 48 times the multiple of its forward earnings at Rs 604 per share. From the issue price of Rs 299, D-Mart has already seen a tenfold growth.
Here on, the journey may be volatile in the near term as competition rises, but experts say it is a good long-term buy.
“Outlook on Avenue Supermarts for the next 3-5 years is strong, but we are not expecting multi-bagger returns from it. Rather it will be a steady compounder,” Vinit Bolinjkar, Head of Research, Ventura Securities told Moneycontrol.
Moneycontrol Research View:
Avenue Supermart is trading at P/E of 73x its FY2023 earnings which are at a premium to other retail players. There are not many listed players focused on grocery segment and general merchandise (forms 80 percent of D Mart’s revenues).
D-Mart is amongst the fastest growing organized retail player with Revenue and Profit CAGR of 32 and 43 percent respectively over the FY14-20 period.
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We expect strong growth in revenues and profitability to continue in the medium term which would support the premium valuation multiples for D-Mart.
However, the company is facing increasing competition from online grocers such as Big Basket, Grofers. With Tata Digital set to acquire Big Basket (transaction not finalised yet), we expect staunch competition for D-MART.
Also, giant online retailer Amazon has entered the grocery market recently which is likely to enhance competition going ahead. Apart from online, other offline players such as Reliance Retail are also expanding fastly which would increase competition.
Listing of the retail arm on the stock exchanges (Reliance or Tata Group potential for Big Basket listing) can provide more options to investors as well. With competition gaining scale, pricing advantage may vanish, and also the growth momentum can moderate which would impact the valuations in the longer run.
What does the valuation say?
D-Mart might look expensive when compared to its peers, but experts feel that the valuations are justified and it will continue to attract premium valuations in the near future as well.
As per fundamental valuation model DDM or Dividend Discount Model computed by IDBI Capital; 33x is a justified P/E multiple for a business which commands 25 percent ROE, pays-out 50 percent dividend (Walmart dividend pay-out ratio during 2015-20 stands at 53 percent), and able to maintain 15 percent ROE in perpetuity at the minimum.
Avenue supermarkets is a quality blue-chip company with a proven track record to generate double-digit returns since its listing back in 2017. Its well-diversified Product Mix along with its strong B2C (Business to consumer) model has put an extra edge over its peers.
“The stock is expensive but has value in its business. Its journey from two stores in the state of Maharashtra and has 170+ stores across 12 states in India by FY20, the extent at which DMart has grown in the last 10 years is commendable,” Gaurav Garg, Head of Research at CapitalVia Global Research Limited told Moneycontrol.
“I believe the growth story might continue in near future too. I believe this stock might remain an investor’s favorite, irrespective of higher valuations which is close to 125 for the Q2FY21 but is justified. The stock is a value buy and should be included in the portfolio in any healthy correction,” he said.
DMart's business model has made the company grow exponentially and now India’s most profitable supermarket chain in India in retail. Penetration of organized food & grocery in India is currently is in the single digits leaving enough potential for growth for all players.
“Penetration of organized food & grocery in India is currently ~ 5 percent. Avenue Supermart has demonstrated strong execution capability and is consistently making a profit in spite of providing the highest discount on all the products,” Atish Matlawala, Sr Analyst, SSJ Finance & Securities told Moneycontrol.
“At CMP of Rs 2,900 valuations look a little stretched, but any correction in the price is an opportunity to buy. We believe Avenue Supermart to deliver 25 percent+ CAGR for the next 5-10 years. However in the medium term stock can remain volatile and provide an attractive entry price for long term investors,” he said.
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