Despite a 110% jump in net profit, brokerages are not excited about DMart

Radhakishan Damani owned Avenue Supermarts that operates the DMart chain of retail stores, on Saturday reported consolidated profit after tax of Rs 418 crore for the quarter ended September 2021, an increase of 110% from Rs 199 crore in the same quarter previous year. Sequentially, the profit is significantly higher from Rs 95.36 crore (low base due to lockdown impact).

Consolidated revenue came in higher at Rs 7,789 crore for the quarter, an increase of 47% compared to Rs 5,306 crore in June 2020 quarter. Sequentially, the revenue is higher by 50% from Rs 5,183 crore.
Overall gross margin was higher at 8.6% compared to 4.3% in the previous quarter and 6.2% in the previous year. Gross margins have improved year-on-year due to relatively long hours of operations, higher general merchandise sales, rising staples/FMCG product prices and higher sales of non-essential products. Net margin for the quarter improved to 5.4% which was at 1.8% in the previous quarter and 3.7% in the same period last year.

DMart has 187 stores that are 2 year or older, and these stores grew by 23.7% in the month of September 2021 as compared to September 2020.

Despite such stellar performance, most brokerages aren’t excited about the stock. Here is what they have to say.

Morgan Stanley | Rating: Underweight | Price target: Rs 4,338

Q2 earnings missed Morgan Stanley’s estimates but were ahead of consensus. Given strong trailing stock performance tactically have assigned ‘Underweight’ rating the stocks. The global brokerage firm awaits a better price to re-enter the stock.

Credit Suisse | Rating: Underperform | Price target: Rs 3,500

Q2FY22 was largely in line with full normalcy being restored after the second wave. D-Mart will continue to execute well on its proven ‘everyday low price’ strategy. Credit Suisse has downgraded its rating to ‘Underperform’ as the stock is trading at extremely stretched valuations.

Kotak Institutional Equities | Rating: Sell | Price target: Rs 3,080

DMart posted Q2FY22 revenue growth of 46.6%/52% YoY/QoQ as lockdown restrictions eased. EBITDA of Rs 6.7 bn was 4% below estimates due to a lower GM (gross margin) of 14.3% as a result of weaker-than-expected general merchandise sales. Store additions will continue to gather pace as construction activity recovers. The brokerage firm believes the stock is pricing in aggressive revenue growth with no margin dilution.

Macqaurie | Rating: Outperform | Price target: Rs 5,950

Q2FY22 profits came in above estimates given healthy sales, better mix and cost control. Macquarie has raised FY22/23/24 EPS (Earnings Per Share) by 6% each to factor in Q2 beat and healthy recovery trend. Recovery would benefit from increased customer adoption in an inflationary environment.

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