As such, investors appear to be factoring a good portion of the optimism on growth prospects. At present, the shares are more than 30% lower than their 52-week high of ₹5,900 apiece seen on 18 October. Still, valuations do not offer much respite. Valuations have come off the peak but are still above pre-covid averages, analysts said. Bloomberg data shows the stock is now trading at 78 times estimated FY24 earnings, which is rather steep.
However, the company’s business recovery has been steady, with disruptions as a result of the covid pandemic waning. Q4 saw the adverse impact of the Omicron covid wave, but June quarter results (Q1FY23), announced on Saturday, did not see covid-related disruptions.
Q1 results have beaten estimates on profitability. Standalone earnings before interest, tax, depreciation and amortization (Ebitda) came in at ₹1,008 crore, which is nearly 356% year-on-year (y-o-y) growth. However, this growth is on a favourable base as last year’s Q1 was affected by the second wave of covid-19.
“Q1FY23 Ebitda beat our and consensus estimates (by 8% and 15%, respectively) on better gross margin, which were at a 12-quarter high, pushing up Ebitda margin to near-record highs," analysts from Jefferies India said in a report on 10 July. Sequentially, the Ebitda margin rose 166 basis points to 10.3%.
However, some parameters are not showing enough improvement. Revenue performance has not been up to the mark. “On a per-store basis, revenue grew 59% y-o-y, but CAGR over a three-year period is just about 2%, not much of a change from what was seen over the last two quarters," said analysts from JM Financial Institutional Securities Ltd. CAGR is compound annual growth rate. The broking firm believes DMart’s near 16% gross margin and >10% operating margin lends flexibility to the business to sharpen its value propositions. “If history is any sort of a guide, we expect DMart’s management to channel its ‘excess’ margin to fund higher growth," said JM’s analysts in a report on 9 July.
DMart’s discretionary contribution mix in Q1FY23 is yet to reach the pre-pandemic levels. The traction in DMart’s general merchandise and apparel categories was better sequentially, but there is still some overhang of covid-19 led disruptions and acute inflationary impact. “High inflation over the last two years hides the possible stress in volume growth for discretionary categories of mass consumption," said the company.
Further, store expansions could boost revenues. “For retail companies, we expect revenue growth to be faster than the rate of growth in the retail area. In the case of DMart, Q1FY23 retail expansion was 24% three-year CAGR compared to 19% revenue growth," said Varun Singh, an analyst at IDBI Capital Markets & Securities.
DMart has opened 110 stores over the last three financial years. However, because of the pandemic and various curbs, these stores have not been able to operate in normal circumstances over the past two years. “The performance of these newly opened stores would be a key indicator," according to Singh. New stores have done well in Q1.
Benefits can be expected from the store additions as normalization gathers pace. All said, faster revenue growth would go a long way in improving sentiments for the stock. However, in the near-term, rich valuations may keep large upsides at bay.
