Why did most brokerages raise their target on Avenue Supermarts stock?

Business Standard

4 days ago

Avenue Supermarts, which operates the DMart retail chain, held an analyst call on Wednesday after market hours. On Wednesday, the Avenue Supermarts stock closed higher by 7.11 per cent on BSE at ₹4,285.15 per share. In comparison, Sensex closed up 0.18 per cent at 81,481.86.
The management, in the call, indicated acceleration in store additions as their utmost priority and believes the margin contraction due to improving service levels over the past several quarters is largely behind. CATCH STOCK MARKET LIVE UPDATES TODAY
Avenue Supermarts con-call highlights:
Management called out a clear preference for growth over margins.
The company aims to open 10–15 per cent of base stores every year, and remains bullish in the offline space with immense potential to grow. The focus is on gaining market share. Management does not mind competition as long as it is able to improve its wallet share.
Consumption trends remain stable with 5–7 per cent inflation range, but double-digit inflation leads to a sharp decline in volumes.
The Total Addressable Market (TAM) is estimated at 2,200 stores across India, indicating an additional store addition opportunity of 1,800 stores. This is very similar to the TAM mentioned at the 2021 analyst meet.
Home delivery remains the dominant contributor to the business, with a 21–22 per cent growth rate driven purely by the DMart Ready business segment.
The fast-moving consumer goods (FMCG) sector continues to face intense competition, particularly on pricing. In the non-FMCG segment, the product mix is shifting towards lower-priced offerings, impacting the overall margin profile.
Brokerages' view on Avenue Supermarts (DMart)
Motilal Oswal has maintained 'Buy' on the stock and has raised the target price to ₹4,950 from ₹4,500 as it models 60 store additions in FY26, against 9/50 store additions in Q1FY26/ FY25.
The brokerage firm has also raised its FY26-28 Earnings before interest, tax, depreciation and amortisation (Ebitda) and profit after tax (PAT) estimates by 2-4 per cent as the increase in CoR (primarily related to staff costs to improve service levels) normalises.
"We build in a consolidated revenue/Ebitda/PAT compound annual growth rate (CAGR) of 19 per cent/20 per cent/18 per cent over FY25-28E, driven by 14-15 per cent CAGR in retail store/area and a high single digit like-for-like (LFL) growth," the brokerage noted.
Nuvama Institutional Equities has also maintained 'Hold' on DMart shares but has raised the target to ₹4,544, from ₹4,086. The brokerage is switching to a SoTP (Sum-of-the-Parts) valuation to assign separate values to the core business and DMart Ready, its key growth driver.
Besides, Goldman Sachs has continued with a 'Neutral' on Avenue Supermarts shares, but has increased the target to ₹3,450 from ₹3,400, owing to expectations around strong store expansion, according to reports. However, the brokerage warned that focusing on improving store experience could lead to higher store costs.
Additionally, store expansion acceleration could lead to margin pressure, negative cash flow, and increasing debt.