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This Radhakishan Damani-owned stock might be down but not out; experts suggest buy on dips

For investors who are holding the stock should hold on to the stock, and keep accumulating the stock on every dip, because D-mart has a unique business model.

April 14, 2020 / 10:05 AM IST

Veteran stock market investor Radhakishan Damani-led Avenue Supermarts was locked in a lower circuit on Monday after the company, which operates retail chain DMart, said operations of half of its stores are closed following the directions issued by authorities amid the lockdown.

The company is retailing only essential items from the operating stores and average footfall is "significantly lower than usual".

"Nearly 50 percent of our stores remain closed for operations based on a directive by the local authorities," it said in a statement.

D-Mart also commenced e-commerce home delivery and bulk deliveries to large housing complexes across the majority of its stores during the first week of April.

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The stock has rallied about 24 percent so far in 2020 despite steep fall seen in the benchmark indices. Both Sensex and Nifty50 are in a bear market and are trading near crucial support levels.

The announcement of the closure of about 50 percent of the D-Mart stores is a near-term shock. Experts feel that it doesn’t alter the long-term outlook of the company. The ones who have bought the stock should hold on, while new investors could wait for a dip before accumulating, suggest experts.

“We expect more than 20 percent growth in D-Mart in the next 2-3 years horizon on strong growth store expansion. The average growth expansion is 24-25 stores per year. But, in the future, management is likely to change the strategy which could lead to additions of 30 stores per year. Strong growth momentum will drive performance,” Amarjeet Maurya, AVP Research at Angel Broking Ltd told Moneycontrol.

“Also, since inception, they have not closed any single story. They also sell the product which is cheaper than e-retail websites. Hence, growth is likely to continue.

For investors who are holding the stock should hold on to the stock, and keep accumulating the stock on every dip, because D-mart has a unique business model. D-Mart also generates a better operating margin than other retail stores even after providing a discount to customers,” he said.

Also read: Breezing through COVID-19 storm! This retail stock owned by Radhakishan Damani can be a multibagger

The Mumbai-based company has a presence in 206 locations through D-mart stores, said a PTI report. India is presently going through an unprecedented complete lockdown of three weeks, ending on April 14, to prevent the spread of coronavirus.

There is no doubt that working at half of the capacity, D-Mart earnings are likely to get impacted in the March quarter as well as the upcoming June quarter. It has stopped the sale of all general merchandise and apparel (~29% of sales) and has seen a reduction in footfalls, given the restrictions on timings and movement.

“Sales from eCommerce home delivery and bulk deliveries to societies are not material enough. Factoring in these and the recent extension of lockdown which has led to the continued closure of ~50% of stores till end-Apr, we cut our FY21 EPS by 9%, while broadly maintaining our FY22 EPS,” IIFL Securities said in a report.

“This crisis has induced stress on the balance sheet of peers and we believe DMart is well placed to benefit from this over the medium term. Maintain ADD,” it said. The brokerage firm also expects a significant reduction in footfalls during the lockdown to be partly offset by the higher bill sizes.

“Accordingly, we build in 14% sales growth in 4Q (vs 24% in 3Q). Mix deterioration (general merchandise entails higher margin) would result in 10% EBITDA growth in 4Q (vs 31% in 3Q),” it said.

Expert: Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor

Amidst lockdown, more than half of D-mart stores are operationally open which would help the stock to outperform among peers at least as most of the peers are not operating or operating at very low capacity. We can expect more upside of 12 to 15 percent from current levels provided market conditions are stable. But a sustained rally in stock would only be visible if there is some stability over the current Coronavirus outbreak and the same is reflected in the larger indices.

Investors should hold the stock for mid-to-long term and accumulate further on every decline as it will continue to outperform its peers. However, the stock is currently trading at rich valuations therefore investor should add the stock on every dip if possible.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Kshitij Anand is the Editor Markets at Moneycontrol.
first published: Apr 14, 2020 10:05 am

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