Home Market Improving operating leverage bodes well for D-Mart stock

Improving operating leverage bodes well for D-Mart stock

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ET Intelligence Group: Avenue Supermarts has made it a habit of consistently beating Street estimates, likely prompting even conservative analysts to upgrade earnings forecasts for the company that runs the DMart retail chain.

Otherwise, rich valuations had made analysts cautious: According to Bloomberg data, of 14 analysts tracking DMart, eight are negative, two neutral and only four positive. But such performance as evidenced in the June quarter could lead them to review their recommendations on the stock.

Against estimates of Rs 221 crore, the company posted a net profit of Rs 251 crore, 44 per cent more than the previous June quarter. Revenue rose 27 per cent to Rs 4,559.4 crore, ahead of estimates.

Neville Noronha, CEO, said that there was a conscious effort to maintain or bring down product prices for consumers across categories. Still, gross margin was a tad higher at 15.6 per cent and EBIDTA margins climbed 800 basis points to 9.3 per cent. Operating leverage, lower interest and depreciation further boosted the net profit margins — up 75 bps to 5.51 per cent.

During the quarter, the company added two stores, taking the count to 157 in total.

In the immediate future, DMart is likely to benefit from improvement in operating leverage. This will help the companys stock sustain at the current price levels. The stock, which was trading at 127 times trailing earnings before the results, is now trading at 115 times. With a couple of strong quarters, the multiples will start heading south.

The DMart management, which has preferred to remain conservative in the past, said that the first quarter is seasonally better than most. However, if the company maintains its first quarter earnings growth rate for the next three, the stock could be trading at 87 times FY19 earnings.

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