Here's Why DMart Got A Rating Upgrade by Morgan Stanley
Morgan Stanley increased the target price on the stock to Rs 4,471 from Rs 3,786, implying an upside return potential of 14%.
Avenue Supermarts Ltd. was upgraded to 'overweight' by Morgan Stanley due to its grocery first strategy to re-engineer growth.
The profitability of the company will benefit once the growth flywheel kicks in, the research firm said. It increased the target price on the stock to Rs 4,471 from Rs 3,786, implying an upside potential of 14%.
"We remain bullish on the long-term opportunity given the substantial addressable market for groceries, with 96% unorganised. We believe D'Mart's model is well placed to take advantage of this opportunity," the research firm said in an Oct. 16 note.
Rising per capita income, the formalisation of a grocery market that was mostly unorganised, the rise in urbanisation, and bigger retail stores suggest significant opportunities for modern retail to grow in India, which makes the macro environment good for DMart.
"This creates a big opportunity for all players, and DMart's business model appears well placed to take advantage of it," the research firm said.
DMart also brings value to customers via low price points, to employees via ownership, and to suppliers through scale. Its reluctance to scale online thus far is a reflection of its strong focus on profitability over scale. DMart’s business model is such that it can invest a lot while earning high ROICs and achieve above-average growth, Morgan Stanley noted.
"Although we have full confidence in DMart's ability to balance growth and profitability, any delay or slower than expected network expansion (given their philosophy of buying land parcels) could slow the medium growth profile," the note said.
Key Monitorables
Top-line growth is led by higher footfalls, bill cuts and improving operational metrics.
Re-imagining of the general merchandise strategy
Store expansion trends
Pace of expansion in the omnichannel business model.
Avenue Supermarts Ltd.'s second-quarter profit fell, missing consensus estimates.
Avenue Supermarts Q2 FY24 (Consolidated, YoY)
Revenue rose 19% to Rs 12,624.37 crore. (Bloomberg estimate: Rs 12,486.2 crore)
Operating profit is up 13% to Rs 1,004.97 crore. (Bloomberg estimate:Rs 1,094.25 crore).
The margin narrowed to 8% against 8.4%. (Bloomberg estimate: 8.8%).
Net profit is down 9.1% to Rs 623.35 crore. (Bloomberg estimate: 746.3 crore).
"2Q, generally a weak quarter, saw a smooth recovery in operational metrics," said Morgan Stanley. "Ebitda margin of 8% missed our estimate by 30 basis points due to higher than expected staff costs and other expenses," it said.
Gross margins at 14.7% (down 45 basis points YoY) remained affected, owing to a weaker product mix, the research firm added.
Morgan Stanleys' Three Key Reasons For Upgrade
The 4-year CAGR revenue growth recovered to 20% vs. 19% and 19.7% in 1QF24 and 4QF23, respectively. This improvement comes after six quarters of declining four-year growth, the note said.
Operationally, revenue per store rose 7% YoY (vs. 5% in 1QF24), while efficiency metrics such as revenue per square feet improved 6% YoY (vs. 3.6% YoY growth in 1QF24 ).
Bill cuts rose 36% YoY and were flat vs. 2HF23, while the average value per bill was similar to 1HF23 at Rs 1,666 and above Rs 1,478 in 2HF23.
Two Common Concerns About DMart
During the festive season and as more stores open, Morgan Stanley expects GMA's share to gradually increase. In the first half of 2024, the share of discretionary GMA was 23.2%, lower than 24.8% in 1HF23 and the peak of 27% in FY20. In FY23, the share was 23%.
Some might worry about the lack of profit improvement, but Morgan Stanley believes that a pick-up in growth will drive improving profitability in the coming quarters.
Shares of the company were trading 0.19% higher at Rs 3,860.50 apiece, compared to a 0.25% advance in the benchmark NSE Nifty 50 as of 2:16 p.m.
It has fallen 5.06% on a year-to-date basis. The relative strength index was at 58.54 as of 2:12 p.m.
Of the 24 analysts tracking the company, 10 maintain a 'buy', six suggest a 'hold,' and eight recommend a 'sell,' according to Bloomberg data. The average 12-month price target given by analysts implies an upside of 3.8%.
