DMart’s valuation comes to question as it reports profit decline after 12 quarters

For the six-month ended September, GM&A sales contributed 23.21 percent to the company’s sales compared to 24.75 percent in the year-ago period. This segment includes bed and bath products, toys, crockery, plastic goods, garments, footwear and home appliances – all higher margin than food and other FMCG products. Food contributed 56.18 percent to sales and non-foods contributed 20.61 percent to revenue.

Also read: DMart Q2 results: Net profit falls 9% to Rs 623.35 cr, revenue up 18.6% but misses estimates

Low GM&A sales, fewer stores

According to analysts, DMart’s EDLP (every day low pricing) strategy continues to work well for staples, however its GM&A sales are facing heightened competition from the likes of Zudio and Max. Even quick commerce companies like Zepto, Blinkit and Swiggy Instamart now deliver bath products, plastic goods, etc.

In an earlier report, Kotak Institutional Equities said that DMart's store-level throughput is still below the pre-COVID levels. This is largely on account of lower footfalls in stores and relatively lower sales of general merchandise category, marginal share-gain of quick commerce and other e-commerce formats at the cost of DMart, higher proportion of new stores coming up in non-metro cities, and larger store sizes.

Foreign broking firm Citi too had highlighted that revenue per square feet continues to be impacted by inferior product mix. “We remain cautious at current valuation given risk around earnings,” it said.

The company added only 9 stores in the quarter gone by, which means 12 stores addition in H1 FY24. This leads analysts to believe that there may be downside risk to FY24 total store addition assumption. For instance, Kotak has an estimate of 55 net store addition.

Furthermore, new stores are being added in non-metro cities of Maharashtra, Madhya Pradesh, Gujarat, Rajasthan and Tamil Nadu, where consumer spending is likely lower.

Also read: Can D-Mart regain its past glory?

Valuation

At 107x trailing price-to-earnings ratio, brokerages find the company’s current financial performance hard to justify such valuations. Both Kotak and Citi have sell ratings on the stock. As per Trendlyne, the consensus estimate of Rs 4,065 on the stock represents only an upside of 3.30 percent from the last price of Rs 3,935.85.

Foreign broking firm Jefferies, too, has retained its Hold rating on the stock, though it has raised target to Rs 3,850 from Rs 3,700 on back of a 'respectable same store sales growth of 8.6 percent'.

Meanwhile, ICICI Securities has cut earnings estimates for FY24E and FY25E by 6 percent and 1 percent, respectively.

The company is clear that it is a grocery-first format, and within that, it has to position apparel, according Nuvama Institutional Equities. “The company is not a fashion lifestyle retailer. It needs apparel experts who understand customers better,” it said.

Over the past few quarters, DMart has also been trying new initiatives such as in-store pharmacy, smaller formats of DMart Minimax and rejig of general merchandise offering in favor of faster moving SKUs.

While these initiatives will bear fruits, believe analysts, it is still some time away. For now, a correction in the stock could be on cards.

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