Radhakishan Damani’s DMart may be an attractive long-term bet; here’s why

In the last three months, shares of DMart have risen over 5 per cent, in sync with the benchmark Sensex which is also up 5 per cent for the period. The stock hit its 52-week high of ₹4,606 on September 2, 2022. As of June 8, 2023, close, the stock is down 23 per cent from its one-year peak.

Is it a good time to buy the stock?

Brokerage firm Motilal Oswal Financial Services thinks so. It has upgraded the stock to a ‘buy’ with a target price of ₹4,200, implying an 18 per cent upside potential in the stock.

Motilal Oswal is positive about the stock as it highlighted DMart has grown its revenues and earnings at a robust CAGR of 23 per cent and 24 per cent, respectively, over the last five years.

The brokerage firm sees a strong potential for the retail firm. “After growing the topline at this scorching pace and achieving a turnover of ₹43000 crore, it has just about scratched the surface in our view. We believe it has a long runway for growth as the modern retail space is still in its infancy in India,” said Motilal Oswal.

Weak SSSG (same-store sales growth) has weighed on DMart’s stock price performance in the recent past, the brokerage firm observed.

Motilal Oswal said DMart’s remarkable consistency in achieving industry-leading growth, margins and ROCE (return on capital employed) despite having a relatively asset-heavy model warrants rich valuations.

“In the last five years, it has traded at 60 times EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation, and amortization) and 99 times PE (price to earnings ratio). After a 25 per cent correction since September 2022, DMart is now trading at 36 times EV/EBITDA and 58 times PE on FY25E, which represents a 30 per cent discount to historical multiples,” Motilal Oswal said, adding that this is mainly attributed to weak SSSG in the recent past.

The brokerage firm believes that concerns about a growing online grocery market are unwarranted, as the share of both online and modern retail is minuscule in the total grocery market, and the market opportunity is huge.

“We believe SSSG improvements in FY24 should boost valuation multiples. We value DMart at 40 times FY25E EV/EBITDA and an implied PE of 64 times on June 2025 to arrive at a target price of ₹4,200. This reconciles with our three-stage DCF valuation, building long-term cash flows and assuming a 4 per cent terminal growth rate and 11.5 per cent cost of capital,” said Motilal Oswal.

Investment rationale by Motilal Oswal

1. Strong footprint addition lately

Motilal Oswal highlighted DMart’s remarkable performance in footprint addition. It said while most retailers found it difficult to expand their footprint in the last three years due to Covid, DMart, despite operating on an ownership model, clocked a strong 20 per cent CAGR in area addition over FY20-23, translating into 19 per cent revenue growth.

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

“We believe SSSG is set to recover in FY24, due to the following factors: (1) easing general inflation, along with raw material cost reduction, may help to revive discretionary demand, (2) a change in the company’s store strategy — earlier smaller 30,000-35,000 sqft stores would mature in three-four 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 three-four year cycles. Those stores are now in the base and will start contributing to the store productivity, with further room to grow footfalls,” Motilal Oswal said.

2. Good cost control in a weak SSSG environment

Motilal Oswal underscored that despite weak SSSG, DMart has managed to protect its EBITDA margin, unlike other retailers, which have seen a 200-450bp margin hit.

“DMart has managed to achieve an EBITDA margin closer to the normal pre-Covid level. This is evident from its SG&A (selling general and administrative) and employee costs, which declined two per cent per sqft over FY20-23 to ₹2,264 in FY23, cushioning the two per cent drop in revenue productivity. When SSSG recovers, strong cost control could help DMart improve its margin by 30-50bp or pass on the gains to drive higher offtake,” said Motilal Oswal.

3. Competitive position in place

Motilal Oswal pointed out that despite the recent aggressiveness of online and quick commerce platforms, DMart remains one of the most competitive grocery retailers, along with JioMart (Reliance Fresh), with 6 per cent lower pricing (versus the average basket value of nine players), consistently over the last 12 months.

“As per our monthly grocery price monitor, in March 2023, DMart at ₹8,500 (basket value) was marginally above JioMart but was 8 per cent cheaper than the pure-play online retailers (such as Zepto, Dunzo, Big Basket, etc.). As per our 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 while maintaining its competitive edge,” said Motilal Oswal.

4. Well-prepared online business

Motilal Oswal observed that DMart Ready, the online shopping platform, has expanded its footprint to 22 cities with store metrics that are close to breakeven. It operates on the next-day delivery model, unlike other quick-service e-grocers, which have lower fill rates and delivery sizes, mostly catering to daily needs instead of monthly grocery orders.

“As per Redseer, the online industry reached a sizeable $8 billion scale in 2022 and is expected to see a 33 per cent CAGR over 2022-2025 (reaching $19 billion by 2025), but most online players have found it difficult to achieve profitability. DMart Ready, on the other hand, has a well-managed model. Although it has not grown rapidly due to weak economics in the online business, it is prepared for any growth opportunities,” said the brokerage firm.

5. Healthy balance sheet and cash flow

Motilal believes DMart’s new stores in many virgin markets with an ownership model need lower investments and allow it to leverage growth for the long term.

“The lean working capital cycle and asset turns have enabled it to garner 18-20 per cent ROIC (return on invested capital) consistently over the last five years (barring the Covid impact). Its healthy annual OCF (operating cash flow) of ₹1,170 crore and ₹2,180 crore in FY24E and FY25E, respectively, should help to add a 16 per cent footprint through internal accruals, thus, offering a self-funded long runway for growth,” said Motilal Oswal.

6. Strong growth potential

Motilal Oswal believes DMart’s SSSG and earnings revision cycle are closer to bottoming out. Tailwinds from robust store additions and consistent cost efficiency could play a key role in SSSG recovery. The brokerage firm estimates revenue and PAT CAGR of 27 per cent and 29 per cent, respectively, over FY23-25.

DMart reported a standalone net profit of ₹505.21 crore for the quarter ended March 2023, registering a growth of 8.3 per cent from ₹466.35 crore in the corresponding quarter last fiscal.

The company reported revenue at ₹10,337.12 crore, up by 21.11 per cent as against ₹8,606.09 crore in the corresponding quarter in the last fiscal.

The stock traded 1.20 per cent higher at ₹3,586.40 on BSE around 10:20 am.

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Disclaimer: The views and recommendations given in this article are those of the brokerage firm. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

Updated: 09 Jun 2023, 10:37 AM IST