Motilal Oswal Upgrades Retail Stock To Buy, Sees High Potential Upside, Scrip Rallies 2.40%

Brokerage firm Motilal Oswal has upgraded the rating on the stock of Avenue Supermarts Ltd. (Dmart) to a 'buy' with a target price of Rs. 4,200/share, implying a 16% upside potential in the stock from its current level.

The brokerage has maintained its positive outlook on the stock. According to the brokerage, DMART has grown its revenues and earnings at a robust CAGR of 23% and 24% over the last five years. After growing the topline at this scorching pace and achieving a turnover of INR 430b, it has just about scratched the surface in our view. "We believe it has a long runway for growth as the modern retail space is still in its infancy in India. Weak SSSG has weighed on DMART's stock price performance in the recent past. In this report, we highlight key catalysts that can accelerate the growth from hereon and discuss our thesis for Rating upgrade," brokerage has said.

Valuation and view: Reaching closer to sanity

According to Motilal Oswal, "DMart's remarkable consistency in achieving industry-leading growth, margins and ROCE despite having a relatively asset-heavy model warrants rich valuations. In the last five years, it has traded at 60x EV/EBITDA and 99x PE. After a 25% correction since Sept'22, DMART is now trading at 36x EV/EBITDA and 58x PE on FY25E, which represents a 30% discount to historical multiples. This is mainly attributed to weak SSSG in the recent past.

"We believe that concerns about a growing online grocery market are unwarranted, as the share of both online and modern retail is miniscule in the total grocery market, and the market opportunity is huge. We believe SSSG improvements in FY24 should boost valuation multiples," the brokerage firm has said.

It added, "We value DMART at 40x FY25E EV/EBITDA and an implied P/E of 64x on Jun'25 to arrive at a TP of INR 4,200. This reconciles with our three-stage DCF valuation, building long-term cash flows and assuming a 4% terminal growth rate and 11.5% cost of capital. We upgrade the stock to BUY."

Stock Outlook - Current Market Price & Returns

On Friday, the stock of DMart closed at Rs. 3,632.10/share, up 2.40% as compared to its previous close. It jumped 2.85% in the past 1 week and 6.89% in the past 3 months, respectively.

It has fallen 5.18% in the past 1 year. However, it has given a positive return of 51.96% in the past 3 years and 127.93% in the past 5 years, respectively.

The stock Recorded its 52 week high on September 02, 2022, at Rs. 4,609/share and 52 week low on March 16, 2023, at Rs. 3,292/share respectively.

It is a large-cap retail sector company with a market capitalisation of Rs. 2,35,456 crore.

About - Avenue Supermarts Ltd. (DMart)

Avenue Supermarts is primarily engaged in the business of organized retail and operates supermarkets under the brand name of D-Mart. DMart is a one-stop supermarket chain. DMart store stocks home utility products - including food, toiletries, beauty products, garments, kitchenware, bed and bath linen, home appliances and more - available at competitive prices.

Disclaimer - The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.