Pricey affair: Do DMart results justify its stratospheric valuations?

That the Avenue Supermarts Ltd stock is expensive was never a point of contention. Since its listing on the bourses on March 21, shares of the company running the supermarket chain D-Mart have more than tripled from the issue price. Currently, at ₹914 per share, the stock trades at almost 76 times estimated earnings for this fiscal, based on data from Bloomberg.

With not many companies in the retail sector growing at the rate D-Mart is, investors seem to be giving it a scarcity premium. A low free float helps.

But while valuations will find support, a new investor will find it challenging to make money from these levels.

On Saturday, D-Mart declared its second quarterly financial results since it went public, and the numbers are not bad. Two reasons helped net profit performance. One, ‘other income’ jumped to ₹22.8 crore from ₹4.88 crore in the same period previous year. That got a boost from interest income, a result of the money raised in the initial share sale parked in fixed deposits.

Second, finance costs declined 13% year-on-year. The upshot: reported net profit increased 47.5% to ₹175 crore.

June quarter revenue yearon-year growth of 35.7% is lower than the 38.6% revenue growth seen in financial year 2017 and 40.6% growth in the March quarter. But Neville Noronha, chief executive and managing director, Avenue Supermarts, is not worried about growth rates tapering. “Some kind of slowdown is bound to happen as base effect comes into play,” he said in a telephone conversation.

To be sure, June quarter revenue growth by itself is robust. Sales got a boost from the 14 new stores that were added in the March quarter. D-Mart added only one store in the June quarter. It typically tends to add more stores in the March quarter.

A little disappointment came from margin performance. D-Mart’s earnings before interest, taxes, depreciation and amortisation (Ebitda) margin narrowed 42 basis points to 8.4% from a year ago. Gross margin declined, says Noronha. Employee costs increased at a relatively faster rate as well. One basis point is one-hundredth of a percentage point.

Ebitda growth for the June quarter has slowed sharply. For perspective: Ebitda increased 29% year-on-year in the June quarter whereas in the March quarter it was 40.7%, albeit on a lower base. The measure had increased about 47% for FY17. This underscores that the company is trading at stratospheric valuations.

Nevertheless, D-Mart’s revenue and Ebitda is more than what Kotak Institutional Equities estimated.

What next? The stock is pricing in the positives and valuations are steep. Investors should watch out for the impact of the goods and services tax, or GST, if any.