After Avenue Supermarts Ltd’s negative earnings surprise in the September quarter (Q2), the stock fell nearly 20% in the following six trading sessions. But investors have found it difficult to stay away from the stock for too long—the stock has increased as much as 39% from its lows.
Avenue Supermarts runs the DMart supermarket chain and enjoys a scarcity premium in the retail industry, enabling it to command supremely premium valuations. Recently, consumption-related stocks have been in favour and that optimism has rubbed off on the DMart stock as well.
The question now is whether a disappointment on Ebitda margin for the second consecutive quarter will turn investors cautious. DMart Q3 results released on Saturday show Avenue Supermarts’s Ebitda margin slipped by a substantial 200 basis points over the year-ago period to 8.3%.
Ebitda is earnings before interest, tax, depreciation and amortization. A basis point is 0.01%.
Ebitda stood at ₹453 crore, falling short of many analysts’ expectations. Analysts from Jefferies India Pvt. Ltd had estimated that the company will eke out an Ebitda of ₹514 crore. Similarly, Kotak Institutional Equities was expecting an Ebitda of ₹510 crore, even as revenue growth at 33% is in line with the broker’s expectations.
Higher costs are the culprit. There was preloading of certain expenses, says the retailer. “We also overspent a little to manage the festival season better through longer operating hours,” said Neville Noronha, Avenue Supermarts’ chief executive officer and managing director, in the Q3 results press statement.
When the market opens today, it is more likely that investors would react to the muted margin performance rather than be upbeat about the robust revenue growth, which was helped by price cuts. Plus, valuations of the retailer that follows everyday low cost-everyday low price strategy are expensive.
The DMart stock trades at almost a 100 times price-to-earnings multiple (97 times, to be precise) based on estimated earnings for FY19, according to Bloomberg data. For the nine-month period ended 31 December, net profit has increased by about 19% over the same period last year. Clearly, earnings growth lags far behind valuations. And net profit growth of just 2% last quarter should prompt analysts to cut earnings estimates.
Besides, in the nine months ended December, nine stores were added, which isn’t impressive. In FY18, store additions were comparatively higher in the March quarter. Accordingly, investors would do well to follow whether the same trend persists.