Radhakishan Damani portfolio stock rises 3% after Motilal Oswal upgrades stock to buy. Do you own?

DMart has grown its revenues and earnings at a robust compound annual growth rate (CAGR) of 23 percent and 24 percent over the last five years. After growing the topline at this scorching pace and achieving a turnover of Rs 43,000 crore, it has just about scratched the surface, according to Motilal Oswal.

"We believe it has a long runway for growth as the modern retail space is still in its infancy in India. Weak SSSG (same store sales growth) has weighed on DMart’s stock price performance in the recent past," the brokerage said.

Despite the recent aggressiveness of online or quick commerce platforms, DMart remains one of the most competitive grocery retailers, along with JioMart (Reliance Fresh), with 6 percent lower pricing consistently over the last 12 months.

As per our monthly grocery price monitor, in May 2023, DMart at Rs 8,500 (basket value) was marginally above JioMart but was 8 percent cheaper than the pure-play online retailers (such as Zepto, Dunzo, Big Basket, etc.) highlighting its cost competiveness against the aggressive online players.

As per the brokerage's price monitor, four times in the last 12 months, it had the cheapest basket value with the widest breadth of the lowest price products. This looks commendable, as DMart has protected its margins, yet maintaining its competitive edge.

While most retailers found it difficult to expand their footprint in the last three years due to Covid-19, DMart, despite operating on an ownership model, clocked a strong 20 percent CAGR in area addition over FY20-23, translating into 19 percent revenue growth.

However, SSSG was weak due to the addition of big stores in the last few years average store size up 23 percent over FY19-23, which pulled down store productivity; and weak discretionary demand in the value category, which reduced its share to 23 percent from 27 percent in FY20.

However, the brokerage believes SSSG is set to recover in FY24, due to the following factors easing general inflation, along with RM cost reduction, may help to revive discretionary demand; a change in the company’s store strategy — earlier smaller 30-35k square feet stores would mature in 3-4 years and see their SSSG peak out, so the company has started to open larger stores since FY19/20, which continue to contribute even after completing their 3-4 year cycles. Those stores are now in the base and will start contributing to store productivity, with further room to grow footfalls.

RK Damani has earned the big bucks from the stock over the years from value investing and his multibagger brain chain Avenue Supermarts or popularly known as DMart. As of March 2023, Damani held a 23.12 percent stake or 149,848,238 shares in the company.