Short-term pain for Avenue Supermarts

The stock of Avenue Supermarts, which owns DMart chain of convenience stores, lost nearly 4% on Monday following a sharp fall in its revenue in the June 2020 quarter. It was the steepest daily fall in about a month. Store shutdowns, restrictions on selling profitable non-essential items, and strict social distancing rules during the quarter to contain the COVID-19 pandemic led to the company’s dismal performance. While the demand uncertainty due to the outbreak will limit the upside for the stock in the short term, a strong balance sheet and low-cost model gives an edge to the company over peers.

DMart has majority of stores in Maharashtra, Gujarat and the southern four states which are one of the most impacted states in India due to the pandemic. In the June quarter, revenue fell by a third to Rs 3,833 crore year-on-year. EBIDTA or operating profit before depreciation and amortisation fell by 81% to Rs 109 crore and net profit dropped by 88% to Rs 40 crore. On a positive side, revenue from the online sales grew by 47% while EBIDTA shot up by 255% year-on-year. While things are expected to gradually improve, analysts expect the earnings to decline by 15-18% for FY21 and then double in FY22.

Historically the company has preferred owning real estate or stores than leasing them. Unutilized cash of Rs 3,000 crore raised through the QIP route will help in bargain hunting for real estate. In addition, a cash rich balance sheet and the leverage it can generate in future provides it with deep pockets to compete with the online players which have become aggressive in the groceries and other categories.

Based on the average estimated earnings per share of Rs 35 for FY22, the stock was traded at a price-earnings multiple of 65 on Monday’s closing of Rs 2232.5. This is lower than the three-year average of 73.