The comparatively lower valuations have prompted some analysts to upgrade their rating. For instance, ICICI Securities Ltd has changed its recommendation on the DMart stock to buy from sell. In a note on 15 May, the broking firm said, “A broad-based market correction (and possibly some technical factors) does bring rationality to buy-at-any-price stories." The report added, “In FY22-24E, we believe it has value and volume tailwinds: inflation (higher absolute gross profit per unit, operating leverage) and likely higher footfalls as more number of consumers prioritise value."
Further, JM Financial Institutional Securities Ltd has upgraded its rating on DMart to buy from hold “after two years to take advantage of the recent steep price correction."
Be that as it may, a potential rise in competitive intensity would hurt. Plus, investors would do well to watch the pace of sales recovery on normalisation. DMart’s March quarter results (Q4FY22), announced on Saturday, show that the Omicron wave hurt sales momentum in mid-January. In the past, recovery has taken 40-50 days after curbs are removed or anxiety of a Covid wave recedes. As such, DMart was able to see good recovery in March.
Overall, standalone revenues in Q4 rose 17.8% year-on-year to ₹8,606 crore. DMart’s gross margin fell 5 basis points to 14.3%. One basis point is 0.01%. However, Ebitda (earnings before interest, tax, depreciation and amortization) margin rose 18 basis points to 8.6%, helped by efficient cost control.
Revenue per store was a bit underwhelming, though. As JM Financial’s analysts point out, “Average revenue per store for the March quarter has grown at just 2% CAGR versus March 2019 quarter’s undisturbed pre-pandemic level. DMart had compounded per-store revenue by 8.8% p.a. on an average (FY17-20) prior to the pandemic." CAGR is compound annual growth rate.
Going ahead, growth pickup in the discretionary segment needs monitoring. According to DMart, “In the discretionary non‐FMCG segment, as of now it is hard to estimate if the relative lower growth is due to a secular change over time due to Ecommerce shift or due to inflation or due to significantly higher Covid related negative economic impact for certain shoppers. We would be able to give that qualitative interpretation only if there are no more Covid shutdowns/restrictions over at least two more quarters."
For DMart, in FY22, the share of revenue from foods, non-foods (FMCG), and general merchandise & apparel stood at 56.86%, 19.74% and 23.40%, respectively. The company opened 50 new stores last fiscal, taking the total count to 284.
Moving ahead, it goes without saying that the lack of further potential covid waves would help faster sales recovery. Additionally, DMart’s e-commerce business has seen a gradual expansion overtime and is now present in 12 cities. That said, a slower than expected turnaround of e-commerce would be a risk for the DMart stock as would be an increase in the competitive intensity. Bloomberg data shows, the stock now trades at nearly 68 times estimated FY24 earnings.