Avenue Supermarts Ltd, which runs the DMart chain of retail stores, is on course to normalcy faster than anticipated. The December quarter results, announced on Saturday, with standalone revenue growth at 10% year-on-year, are testimony to that. This marks a reversal from the declining trend seen in the first two quarters of this financial year (FY21) and by a wide margin at that. Moreover, it also looks good considering the September quarter results had fallen short of expectations.
On Monday, shares of Avenue touched a new 52-week high in early deals on the NSE.
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Another bright spot is the expansion in earnings before interest, tax, depreciation and amortization (Ebitda) margin of 52 basis points vis-à-vis last year. One basis point is one-hundredth of a percentage point. “Margin for the December quarter at 9.3% is as normal as it could get,” said analysts from JM Financial Institutional Securities Ltd in a report on 9 January. The analysts added, “Margins for two quarters pre-pandemic was 8.7-8.8% despite more than 20% sales growth during those periods.” According to JM Financial, there are possibly two factors that drove this: lower level of discounting on FMCG and significantly lower overhead costs. FMCG is fast-moving consumer goods.
According to Avenue, agile operational expenses management along with a good surge in festival shopping helped in the December quarter. In the September and June quarters, Ebitda margin had understandably contracted and stood at 6.2% and 2.8%, respectively.
Overall, Avenue’s December quarter Ebitda growth was 16.6% year-on-year.
So far so good. And here’s when investors should start becoming cautious. One, the road ahead has some speed bumps. Two, Avenue’s shares remain expensive. As such, the festive season did help Avenue’s December quarter. The company, though, has said December didn’t trend as well as the festival months of October and November. “A slowdown in performance in December (due to weak demand and store operation restrictions, in our view) means that complete recovery and return to the historical growth trajectory could still be some time away,” said analysts from ICICI Securities Ltd in a report on 10 January. For perspective: in FY20 and FY19, Avenue’s revenues had increased by nearly 24% and 33%, respectively, compared with the same period last year. Further, investors should watch whether December quarter margins sustain with raw material prices increasing and inconsistent supplies from the non-FMCG sector.
As mentioned earlier, Avenue’s valuations remain pricey. The stock trades at a whopping 206 times trailing twelve-month earnings. Needless to say, meaningful upsides will be tough hereon. “Valuation is stretched even after cognizing for DMart’s hyper-growth characteristics,” points out JM Financial. In general, strong momentum from online retailers in a post pandemic world is a looming threat. In the December quarter, Avenue has made a soft launch of its e-commerce operations in select pin codes in three cities. Even so, the company’s primary focus would continue to be its brick-and-mortar operations.