Is DMART Stock A Good Investment – Avenue Supermarts Ltd which owns and operates the DMart retail chain is among the most successful consumer focused businesses in the last decade. Backed by promoter Radhakishan Damani, Avenue Supermarts has disrupted the retail sector with its unique business model focused on value retailing. After a stellar listing in 2017, is DMART stock still a good investment for your portfolio? Let’s analyze in detail.
Overview of Avenue Supermarts and DMart Business
Here are some key facts about DMART’s business model:
- Founded in 2002 by Radhakishan Damani, opened first store in Powai, Mumbai
- Pioneer of discount retail stores format offering value pricing on daily needs
- Offerings include staples, FMCG products, general merchandise, apparel
- Operates nearly 300 DMart stores across India as of Nov 2022
- Stores located mainly in Maharashtra, Gujarat, Andhra, Karnataka, Telangana
- Listed on NSE and BSE in 2017 through most successful IPO of the decade
- Among the most profitable retail companies in India with industry leading margins
DMart has emerged as a major disruptor through its simple yet effective business model focused on lean operations and low pricing. But risks remain.
Detailed Financial Analysis
Let us look at some key financial metrics to gauge DMART’s performance:
- Revenue has grown at a stellar 33% CAGR over FY17-22 period rising from Rs 11,000 crores to Rs 50,000 crores
- EBITDA has surged from Rs 640 crores in FY17 to Rs 4,500+ crores in FY22
- Net Profit has jumped from Rs 300 crores to over Rs 2,600 crores during same period
- Net Profit Margins have consistently been in the high single digits making DMart among the most profitable retailers
- Return on Equity has averaged 30%+ highlighting capital efficiency
- Debt levels are negligible for DMART with leverage ratios <0.1x
Backed by its strong growth and profitability metrics, DMART has emerged as a consistent compounding story and wealth creator for investors.
Avenue Supermarts Share Price and Valuation
- DMART share price has risen from IPO price of Rs 299 in 2017 to Rs 4,350 currently, generating stellar multibagger return of over 13.5x in just 5 years
- Market Capitalization stands at Rs 2.8 lac crores as on Nov 2022 making it among the top 25 Indian companies
- Has consistently traded at elevated valuations with 1 year forward P/E of 84x currently
- EV/EBITDA multiple is also expensive at over 55x based on FY23 estimates
- Price to Book ratio currently stands at 18.7x reflecting premium valuation
To summarize, DMART’s valuation appears too expensive currently leaving limited margin of safety.
Key Growth Drivers and Potential Risks
Avenue Supermarts and DMart business has strong growth levers:
- Huge scope for store expansion with targeted 800+ stores over the long term
- Gain market share by entering new geographies like North and East India
- Leverage strong brand equity and high repeat customer rates for expansion
- Potential to drive higher share of private labels with better margins
- Long growth runway as organized retail penetration increases in India
- Lean operations and strong balance sheet to fund growth
However, some risks DMART faces are:
- Sustaining high revenue growth and profitability becomes challenging as base expands
- Growing competition from offline retailers and e-commerce players
- Need for continued promoter involvement given unique model
- Execution risks in expanding to non-traditional markets
- Pressure on margins from rising costs and higher spend on capabilities
To summarize, DMART enjoys favorable growth prospects but will need to manage risks effectively.
The Final Verdict: Should You Invest in DMART?
Here is a perspective on whether DMART fits into the portfolio of a long term investor:
Positives – Unique model, high growth and profitability, strong branding and customer traction. Leader in value retailing format with long runway.
Negatives – Rich valuations allow limited margin of safety. Scaling up while maintaining profitability will be challenging. Limited equity float and promoter dependence.
DMART remains a structural story to play Indian consumption. But premium pricing warrants caution while investing.
Current valuations don’t offer an adequate entry point. However, investors can accumulate DMART on significant corrections for long term gains despite near term challenges.
FAQs on Investing in DMART / Avenue Supermarts
Is DMART stock worth buying after the recent correction?
DMART stock appears to still trade at expensive valuation despite correcting nearly 25% from its peak. Investors may be better off waiting for the valuation multiples to cool off further rather than rushing to buy after the recent dip. DMART remains a good long term bet but merits caution at current levels.
What return can I expect from DMART in next 3 years?
Given the premium valuation, DMART stock may deliver low to mid teen returns of around 12-15% CAGR over next 3 years. Strong earnings growth will be offset partly by some de-rating in the valuation multiples from the current elevated levels. Investors must moderate their return expectations.
What is the outlook and target price for DMART in 2023?
Most analysts expect DMART share price to trade in the range of Rs 3800-4200 through 2023. This points to muted upside from current levels of Rs 4350. Challenging macro environment and rich multiples are seen capping near term upside despite DMART’s long term structural growth story.
Should I buy DMART shares at current price for long term?
DMART remains a good structural story for long term portfolios. However, given the premium valuations with P/E of 84x, investors are better off waiting for 10-15% price corrections before accumulating the stock. Valuations need to cool off somewhat before turning favorable for fresh buying.
Is it a good time to buy DMART stock after the huge rally this year?
DMART stock price has surged over 65% in 2022 so far, significantly outperforming broader indices. While long term growth levers remain intact, current valuations limit margin of safety after this stupendous rally. Investors are advised to avoid lumpsum buying at current levels and adopt a staggered accumulation strategy.
What is your view on DMART for a 5 year investment?
DMART remains a structural story given the low penetration of organized retail and its strong brand position. We expect 20%+ earnings CAGR over next 5 years. However, most returns will come through earnings growth rather than further re-rating. Investors must buy on significant dips only and brace for some volatility after the recent rally.
What are the key risks to investing in DMART at current valuations?
Key investment risks are rich valuations with one year forward P/E of 84x allowing little margin of safety, execution challenges in expanding into newer geographies, pressure on margins and growth as base becomes larger and competition intensifies from offline & online players.
Is DMART a multibagger stock for long term?
DMART has multifaceted prospects given the huge growth potential in organized value retail. The stock can potentially double in 4-5 years driven by store expansion, new geographies and growth levers like private labels and digital integration. However, premium valuations remain a key concern in realizing this multibagger return potential.
How does DMART compare to Trent for long term investment?
DMART scores strongly in terms of proven business model, high growth and capital efficiency. However, Trent has better valuation comfort currently and improving growth outlook. Investors may look to have a mix of both stocks in their portfolio to get exposure to India’s promising retail consumption story.
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