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BQEdge | Why DMart Has No Room For Error And What The Money Flow Indicates For IndusInd’s Stock

BQEdge is specially curated for BQBlue subscribers. Every day this note will offer special equity market and stock-specific insights and flag select emerging trends in the tricky-to-trade derivatives market.

On Today’s Edition:

  • IndusInd Bank’s futures build up is not painting a pretty picture.
  • Why there is no room for error for DMart parent Avenue Supermarts.

IndusInd Bank Searching For Support

DMart: Valuation Leaves No Room For Error

DMart holding company Avenue Supermart's shares trade at 78 times its 12-month forward earnings, shows Bloomberg data. To support this lofty valuation, it has to click on all counts every single quarter. Unfortunately that didn't happen in the third quarter of FY19.

Not only did the retailer's EBIDTA and net profit grow at its slowest since listing, the EBIDTA margin slipped 200 basis points compared to the same quarter last year. This despite higher revenue in the festival season-dominated quarter. And, though on a sequential basis the margin has shown a 30 basis point improvement, it has now witnessed two quarters of margin decline. Three, if you count the last quarter of FY18.

Infact, the last three years suggest that Q3 should usually be the quarter of a margin spike (festival quarter) before a decline in Q4. So this doesn't bode well for the ongoing quarter either.

The management said:

  • Operating costs inched upwards due to preloading of certain expenses, primarily around capability building across infrastructure and people
  • Have overspent a little to manage the festival season better through longer operating hours
  • Continue to operate longer hours in certain stores even after festive period.

This plays into the dominant fear since the beginning of the fiscal. That it would be tough for the company to sustain infrastructure, quality of manpower, store expansion and higher investments behind its e-commerce offering, whilst keeping the operating margin intact.

With that fear playing out it seems inevitable that investors and analysts, while appreciating the higher topline growth, will lower their earnings estimates prompting a revision in P/E multiples.

JM Financial and Goldman Sachs, who have a ‘Buy’ rating on the stock, expected DMart to clock a 9 percent margin in financial year 2019 and 2020. While Citi and Kotak who have a sell rating, also expected the company to clock atleast 9 percent EBITDA margin in these two years.

Right now both sides are off by at least 50 basis points.