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D-Mart lands first sell rating as shares soar

LiveMint logoLiveMint 24-04-2017 Nasrin Sultana

Mumbai: The rich valuations of Avenue Supermarts Ltd, the owner of D-Mart, are finally beginning to worry analysts. A month after Avenue Supermarts’s blockbuster debut on the bourses, Kotak Institutional Equities has come out with the first sell rating for the grocery retail chain.

At 2.5 times its initial public offering price, the current market price is 46 times expected earnings for fiscal 2019, “expensive in our view,” wrote Kotak Institutional Equities analyst Garima Mishra in a 24 April report initiating coverage on the stock.

The Avenues Supermarts stock has climbed 145% since its listing on 21 March. On the first day of trading, the stock doubled its value. On Monday, it closed 2.4% lower on BSE at Rs726 a share.

Despite forecasting strong earnings growth for the firm and lauding its business model, the Kotak report is skeptical about the valuations.

“Given its focus on retail of everyday consumption items such as food and HPC (home & personal care), we believe D-Mart has built a viable business that can scale beyond Maharashtra, Gujarat and Andhra Pradesh/Telangana where the bulk of its stores are present,” the report said.

Yet, it has highlighted four key risks—a sharp decline in the pace of same-store sales growth, slower than expected ramp-up of new stores, competition from other retailers and e-commerce companies, and an increase in land prices.

Kotak forecasts Avenues Supermarts to grow its operating profit and net profit at an annual average of 28% and 35% respectively over the next three years.

D-Mart has been perhaps the most successful modern retailer in India by focusing on owning its stores (instead of leasing them) and following a high-volume no-discount model.

Kotak forecasts Avenues Supermarts to grow its operating profit and net profit at an annual average of 28% and 35% respectively over the next three years.

That said, a sell rating doesn’t imply that the stock price is set to fall or won’t find support.

Ambareesh Baliga, an independent equity analyst, also agreed that valuation of D-Mart is expensive but said the stock price may not see any correction now.

“There are many long-term investors of D-Mart in the markets who are not willing to sell and hence the stock is unlikely to fall anytime soon,” he said

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