DMart profit nearly vanishes in Q1; stock now trades at 140 times earnings

DMart profit nearly vanishes in Q1; stock now trades at 140 times earnings

• Parent Avenue Supermarts was able to add two stores in the last quarter, taking the count to 216 as on 30 June. It has recovered about 80% or more of pre-covid sales in most stores where operations are allowed unhindered
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• In mid-February 2020, when Radhakishan Damani and other promoters of Avenue Supermarts Ltd sold a 2.28% stake in the company, it was considered a masterstroke. After all, markets were at their peak, and it was just before they corrected on account of coronavirus fears. The cut-off price for the sale by the promoters was fixed at Rs2316 a piece, or 118 times trailing earnings at the time.

• five months hence, the world has changed, but shares of Avenue Supermarts, which runs the DMart chain of retail stores, are unmoved. Ahead of its June quarter results, the company’s shares traded at ₹2,323.F
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• Investors told themselves that sales of essentials have not been hit by the pandemic, and that the company will get by fine. Indeed, there was a visible month-on-month improvement in Q1. Turnover in April, May and June declined by 45%, 35% and 20% respectively, as per JM Financial Institutional Securities Ltd’s workings.

• But investors and analysts ended underestimating the impact on profits by a huge margin. Hardly anyone was prepared for an 86% drop in earnings per share in Q1 to merely ₹0.77.

Covid-19 led collapse

• Avenue Supermarts' earnings in Q1FY21 fell by a whopping 86% year-on-year as covid-19 led disruptions weighed on performance
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• “There appears to have been no saving in ‘other expenses’ whatsoever, despite some stores being closed for a few weeks altogether," analysts at JM Financial said in a report on 11 July, On a standalone basis, other expenses increased by 22% year-on-year during the June quarter. Employee costs, too, spiked by 29% year-on-year.
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• As a result, earnings before interest, tax, depreciation and amortisation (Ebitda) margin shrunk to 2.8%, from 10.3% in the year-ago period.

Cost pressures

Avenue Supermarts' Ebitda margin in Q1FY21 dropped sharply to 2.8%, as costs remained relatively higher last quarter

Q1FY20

10.3

Q2FY20

8.7

Q3FY20

8.8

Q4FY20

6.7

Q1FY21

2.8

• At the time of writing, DMart shares were about 3% lower at₹2,250 apiece, resulting in a valuation multiple of nearly 140 times trailing earnings. While investors seem to be assuming that things will only get better from here, the impact on profitability cannot be disregarded. DMart said it has recovered about 80% or more of pre-covid sales in most stores where operations are allowed unhindered. "This is a concern, as it implies store-level revenue decline of about 20% to continue for the September quarter, even for stores which are fully functional," said analysts from Credit Suisse Securities (India) Pvt. Ltd in a report on 13 July.

They add that market share in large city retail is being taken up by mom-and-pop stores (kirana) and e-commerce. “The longer the impact of covid-19, the higher are the chances of some consumers permanently shifting to e-commerce," Credit Suisse analysts wrote in the note.

• Moreover, demand for discretionary products is still tepid, especially for the non-FMCG (fast-moving consumer goods) categories, which typically enjoy higher margins. General merchandise & apparel, where sales have been hit most, accounted for 27.3% of revenues in FY20. As such, the impact on profitability will continue for some time.
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• DMart trades at an exorbitant valuation multiple of 140 times trailing earnings. Investors clearly assume great things lie in store in the future. While this may be true, the journey in the near-term is painful and the recovery will be gradual. It makes sense for investors to tone down expectations, especially now that the impact of the pandemic to near-term profits is known.