Here, we are going to study the Q3 results of D-Mart and why those results have had such a negative reaction on the company’s stock. There was almost a drop of 11-12% in the stock price of D-Mart on 14th January 2019. The stock fell by almost Rs. 170 from the levels of 1,570 to 1,400 levels.
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- Traditionally, every year Avenue Supermarts grows around 30-40% in all parameters. And same can be seen in the case of sales.
- The growth in Operating profits has fallen very low as compared to its traditional growth of 30-40%.
- In Net profits too, there are hardly any growths, which are very negligible in front of its traditional growths.
- This were the most disappointing numbers. And also the major reason behind the stock price fall.
- Avenue Supermarts used to enjoy its rich valuations because of these high and constant growths every year in all parameters. The stock which used trade with P/E around 100 has fallen to trade with P/E around 90.
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The next quarter, that is March 2019, may get Avenue Supermarts back on track as March 2018 will provide a lower base. So, even if Avenue Supermarts continues its current margins, then it may be able to regain its traditional growths.
But this does not mean that we should take calls based on predictions of that quarter in the short-term.
Definitely, Avenue Supermarts won’t be able to maintain such rich valuations but is look at the business of Avenue Supermarts in the next 5 or 10 or 15 years, then this company looks as a very good investment option.
Reasons Behind the Low Net Profits leading to Stock Price Decline
Why were the net profit numbers so disappointing? The major reason can be traced out as follows: –
- Increased Competition from E-commerce Companies –
They have started experiencing competitions from companies like Groffers, BigBasket, etc. To tackle this D-Mart too has increased its focus on its e-commerce segment.
- Sales from Same Store Growth (SSSG) –
Previously, this numbers generally used be up by more than 20%, but the analysts predict that this growth this time may settle down around 15-18%. The actual numbers will be revealed in the annual report of the company.
- Price Cuts –
The company has absorbed a lot of price cuts in this quarter. The sales growth can be seen at 33%, but because of the price cuts the margins shrunk which resulted in only 2% and 7.5% growths in net profits and operating profits respectively.
D-Mart had to make these price cuts to compete with Big Bazaar and Reliance Retail.
- Real Estate (their stores) –
The company believes in buying a property for opening up their new stores rather than leasing or renting it. If they don’t have enough cash flow, then they take on debt to buy the properties. And some of such new properties are not giving expected growths. There they have to compulsorily have to return the rate of interest charged on the loan, but those stores are not generating enough cash flow to repay those debts. Thus, D-mart then has to direct the cash flow from their other profitable stores. Therefore, real estate investment have proved to be a little troublesome for the company according to the current trend (which does not mean that the trend will continue).
They opened 2 new stores in Q1, 3 in Q2 and 4 stores in Q3. They had targeted to open at least 20 stores in the year 2018-19. So, this looks a little difficult as they may not ad 11 stores in the last quarter.
When u look at all the above parameters, then it can be questioned whether such rich valuations (P/E-108, What is ROCE (Return on Capital Employed)-22%, What is ROE (Retuen on Equity)-20%) are sustainable or not.
- The fundamentals of the company are still very strong. But they may not be able to maintain the rich valuations it is enjoying right now.
- If this stock is on your radar, then buying this stock at a 30-40% downward trend from the peak can be thought of.
- We are not suggesting anyone to go and buy this stock immediately.
- Nor are we forcing anyone to go and invest in stock market.
- In no way it has been said that this a bad or a good company. Only a view on it Q3 results has been presented here.