Radhakishan Damani's DMart falls most in 5 months. Time to stay put or book profits?

Shares of Avenue Supermarts, the company behind hypermarket chain DMart, owned by billionaire investor Radhakishan Damani, registered their biggest single-day losses in nearly five months, as they fell 4% intraday on Monday, October 16.

DMart earnings have made several top brokerages remain mixed on the stock. While Kotak's 'Sell' rating stays due to punchy valuations, Nuvama has a 'Buy' rating with a target of Rs 4,021.

Domestic brokerages Motilal Oswal and Centrum broking have 'Buy' ratings on the counter, with a target of Rs 4,500 and Rs 5,006, respectively. The target from Centrum implies a potential upside of 31% from today's session. This is also the highest price target for the retail stock on the Street.

"We remain attracted by DMart's sharp execution skills and large opportunity size. The organised grocery retail industry penetration is at 4-5% in India giving enough headroom for the company to grow," the brokerage said.

On October 14, the company reported 9.1% year-on-year (YoY) decline in net profit at Rs 623.4 crore for the September quarter of fiscal FY24. The retailer reported a profit decline after 12 quarters.

After a positive spurt in productivity, the hypermarket chain again reported a miss with EBITDA up only 12% year-on-year (YoY), 6% below Street estimates, as General Merchandise & Apparel (GM&A) share stayed below pre-Covid and was even down YoY.

While DMart in its analyst meet did highlight efforts to improve its GM&A share, it will be a prolongated execution, according to analysts at Nuvama Institutional Equities.

"The miss on performance, coming especially from lower gross margins, is concerning as it could point to a structural shift or a much longer than anticipated journey back to earlier GM&A mix/ pre-covid trajectory," Nuvama said in a note.

Analysts reckon that the pressure in the apparel segment is due to heightened competitive intensity in the value segment, stress in basics category (home wear, casual wear) and lower discretionary spends due to high inflation.

Dmart, as per brokerage house Kotak, is attempting to correct this by tweaking merchandise and assortment albeit retaining focus on low fashion, everyday use apparel, and sharply controlling inventory turns and avoiding build-up of inventory.

At 8.6%, SSSG (same store sales growth) for the first half of this fiscal (H1FY24) was stable, in-line with analysts' annual estimate of 8.5%.

DMart opened nine stores this quarter and 12 in H1FY24 (18 during H1FY23) taking the total store count to 336 stores. Employee costs and other opex both increased quarter-on-quarter as the company opened nine new stores.

The hypermarket chain's store additions remained muted but should see a ramp-up, believe analysts.

Amnish Aggarwal of Prabhudas Lilladher said that DMart has a huge runway to grow with over 1500 store potential in duopoly market and scale up in DMart Ready. "We remain positive and increase target price to Rs 4,724 from Rs 4,576 earlier," he said, with a 'Buy' rating on the counter.

DMart reported standalone revenue growth of 18.5% YoY for the second quarter. Gross margin came in at 14%, down 50 basis point on-year and down 60 basis point QoQ. Lower consumer spending in General Merchandise and Apparel continued and affected the margin mix again.

Overall, the company reported standalone EBITDA of Rs 1000 crore, up 12% YoY. EBITDA margin at 8.1% was again below the average Q2 EBITDA margin of 8.5% pre-Covid. Profit Before tax (PBT) increased 12% YoY. The tax rate stood stable at 25%.

In Avenue Supermarts, Damani owns 23.03% stake or 14.98 crore shares. His wife Shrikantadevi Radhakishan Damani holds 1% stake in the firm. His brother Gopikishan Shivkishan Damani owns 5.60% stake in the operator of leading retailer D-Mart.

DMart shares opened over 3% lower at Rs 3,807.65 apiece on the BSE today. From its peak of Rs 5899.9, the scrip is down 35%, and has underperformed the benchmark Nifty 50 index and the Nifty Midcap index.