D'Mart's margins turn a worry

Several brokerage firms cut target price for Avenue Supermarts, which operates D'Mart stores, stating the earnings were not strong enough to justify valuations.

The shares of the value retailer came under selling pressure on Monday, falling over 7% after it reported lower-than-expected quarterly earnings on Saturday. The company reported a 38.9% year-on-year increase in its revenue to Rs 4,872.52 crore during the second quarter ended September 30. Net profit grew 18.1% to Rs 225.60 crore.

Brokerage firm Motilal Oswal in its report said Avenue Supermarts's on-year Ebitda (earnings before interest, tax, depreciation and amortisation) growth of 23% and 18% rise in profit after tax (PAT) were much below revenue growth, primarily due to 180 basis points decline in gross margin to 14.3%.

The management recently highlighted during an analyst meet that the high ebitda margin may not be sustainable as the company plans to prioritise price competitiveness versus margin improvement.

The Motilal Oswal report also said the risk of competitive pricing by peers has led to gross margin shrinking and has contained Ebitda margin. At the market price of Rs 1,411, the stock was expensively valued at 63x/48x FY20/21E P/E with limited room for re-rating, it added.

The price to earnings (P/E) ratio is the ratio of a company's stock price to the company's earnings per share.

Shares of Avenue Supermarts fell as much as 7.14% on Monday, touching, and intra-day low of Rs 1,310, wiping off over Rs 6,000 crore of market valuation. The stock closed at Rs 1,333.15 apiece on BSE, down 5.5% over the previous close. On NSE Nifty 50, shares of Avenue Supermarts ended at Rs 1,323.70 apiece, down 6.23%. The market cap of the company stood at Rs 83,199.82 crore on BSE.

Kotak Institutional Equities Research in its earnings report said the strong revenue growth seems to be partly driven by heavy price discounts provided by D'Mart across categories. This seems to be in line with the company's earlier stated strategy of capping gross margins at an average of 15% annually and passing on any additional benefits received from suppliers to customers. D'Mart's gross margins were among the lowest ever in the past ten quarters and led to a 13% miss in Ebitda and 15% miss in net profits, the report said.

Stock brokerage Prabhudas Lilladher in its report said the strong sales is led by "Everyday low price" strategy and gains from operational and distribution efficiencies, which reduced cost of retail by 75 bps year on year. The company has lowered prices across categories led by benefits from a higher scale, which reinforces its pole position of a value retailer.

NOT A GREAT BARGAIN

• Rs 83,199.82 cr - Market cap of the company on Monday
   
• 180 bps - Decline in gross margin to 14.3% in September quarter
   
• 13% - Miss in Ebitda during the quarter, as per Kotak Institutional Equities Research