Will a mar­gin fall again de­ter in­vestors at Av­enue Su­per­marts-run Dmart?

Mint ST - - MARK TO MARKET - Pallavi Pen­gonda [email protected]

After Av­enue Su­per­marts Ltd’s neg­a­tive earn­ings sur­prise in the Septem­ber quar­ter, the stock fell nearly 20% in the fol­low­ing six trad­ing ses­sions. But in­vestors have found it dif­fi­cult to stay away from the stock for too long—the stock has in­creased as much as 39% from its lows.

Av­enue Su­per­marts runs the Dmart su­per­mar­ket chain and en­joys a scarcity premium in the re­tail in­dus­try, en­abling it to com­mand supremely premium val­u­a­tions. Re­cently, con­sump­tion-re­lated stocks have been in favour and that op­ti­mism has rubbed off on the Dmart stock as well.

The ques­tion now is whether a dis­ap­point­ment on Ebitda mar­gin for the sec­ond con­sec­u­tive quar­ter will turn in­vestors cau­tious. De­cem­ber quar­ter num­bers re­leased on Satur­day show Dmart’s Ebitda mar­gin slipped by a sub­stan­tial 200 ba­sis points over the year­ago pe­riod to 8.3%.

Ebitda is earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­za­tion. A ba­sis point is 0.01%.

Ebitda stood at ₹453 crore, fall­ing short of many an­a­lysts’ ex­pec­ta­tions. An­a­lysts from Jef­feries In­dia Pvt. Ltd had es­ti­mated that the com­pany will eke out an Ebitda of ₹514 crore. Sim­i­larly, Ko­tak In­sti­tu­tional Equities was ex­pect­ing an Ebitda of ₹510 crore, even as rev­enue growth at 33% is in line with the bro­ker’s ex­pec­ta­tions.

Higher costs are the cul­prit. There was preload­ing of cer­tain ex­penses, says the re­tailer. “We also over­spent a lit­tle to man­age the fes­ti­val sea­son bet­ter through longer op­er­at­ing hours,” said Neville Noronha, Av­enue Su­per­marts’ chief ex­ec­u­tive of­fi­cer and manag­ing di­rec­tor, in the third quar­ter re­sults press state­ment.

When the mar­ket opens on Mon­day, it is more likely that in­vestors would re­act to the muted mar­gin per­for­mance rather than be up­beat about the ro­bust rev­enue growth, which was helped by price cuts. Plus, val­u­a­tions of the re­tailer that fol­lows every­day low cost-every­day low price strat­egy are ex­pen­sive.

The Dmart stock trades at al­most a 100 times price-to-earn­ings mul­ti­ple (97 times to be pre­cise!) based on es­ti­mated earn­ings for FY19, ac­cord­ing to Bloomberg data. For the nine-month pe­riod ended De­cem­ber, net profit has in­creased by about 19% over the same pe­riod last year. Clearly, earn­ings growth lags far be­hind val­u­a­tions. And net profit growth of just 2% last quar­ter should prompt an­a­lysts to cut earn­ings es­ti­mates.

Be­sides, in the nine months ended De­cem­ber, nine stores were added, which isn’t im­pres­sive. In FY18, store ad­di­tions were com­par­a­tively higher in the March quar­ter. Ac­cord­ingly, in­vestors would do well to fol­low whether the same trend per­sists.

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