InvestorQ : I want to buy D-Mart but am a little worried about buying the stock at these prices as it already richly valued. Can I get further profits on the stock from here?
Mahima Roy made post

I want to buy D-Mart but am a little worried about buying the stock at these prices as it already richly valued. Can I get further profits on the stock from here?

Aditi Sharma answered.
2 years ago

You will be surprised if I tell you that although the stock is quoting at a rich P/E ratio of over 100X, it is not necessarily overpriced. Of course, there were some real concerns when Avenue Supermarts (the company that operates the chain of D-Mart Stores) actually reported lower profit growth two years earlier and also in the last few quarters. This sharp fall in profit growth led to concerns that the valuations may be a little too steep for comfort at nearly 100 times earnings. While the concerns are justified, you need to look at the huge prospects of the stock and not get overly worried about the same. Here are some reasons.

GST is working in favour of D-Mart

The real reason for the sharp fall in profit growth in the previous few quarters was a direct outcome of aggressive re-stocking that the company had done in the aftermath of the GST launch. The GST implementation impacts retail players in a big way. The restocking that we are seeing is in a way the reversal of the de-stocking that happened in the immediate aftermath of the GST launch. The company had already cautioned investors and analysts that the GST could have a lag effect in the form of re-stocking. For a retailer this creates problems of a larger gap between the cost of goods and the sale of goods. It is this time lag that has caused this problem and should rectify itself on its own in the months to come.

Company is focusing on growth and debt reduction

The two big stories post the IPO are still intact for D-Mart. Firstly, the company has continued to expand its footprint in a big way. The primary focus of bringing sales outlets closer to the customer continues and that should continue to remain its forte. As D-Mart continues to churn out its salivating discounts, the retail business in India is likely to spur further. D-Mart combines two key aspects of the retail business. On the one hand it brings you the benefits of large-retail in the form of lower costs. On the other hand, D-Mart brings the added advantage of accessibility that your Kirana shop down the street offers. Secondly, the company has used the IPO proceeds to reduce its debt on the retail properties that it owns. That impact on EBIT margins should start showing up soon. In a nutshell it is a combination that is going to be extremely hard to beat.

Why D-Mart can still be a buy

In the investment world; whenever you are doubt you can adopt a phased approach or a SIP approach. Don’t get intimidated by the P/E ratio of D-Mart. It will eventually justify these valuations. The trick is to use any dips in the stock price to add on to the stock. Over the next few months, if you can reduce your holding cost of D-Mart, the job is half done. There really is no better proxy for the Indian consumer growth story and D-Mart is a best representation of the India consumer story.