DMART reported a robust growth in Q2 FY22. Can the retail giant continue the trend?

The retail giant, DMart’s bullish momentum spills into Q2 and there seems to be no looking back. This is proved with the stock price zooming 94% in one year and outperforming the Nifty50 benchmark which only grew 54% in the same period.

The retail giant vows to its winning business model which has resulted in a whopping 46% sales growth in Q2, year on year basis, giving a tough competition to its competitors. The company successfully added 8 more stores in Q2, reaching a new total of 246 stores.

With such success, one may also question its high valuations. Is the high PE of 239 justifiable? Or is the 106x FY23e PE fair in correlation with its fundamentals? Can this affect the company’s ratings in the future?

So far, the company seems to have a clear positive outlook on the long-term view and would continue to do so.

DMart’s business model earning profits through scale and lower costs makes a strong case for its future valuations. This is evident with the company’s performance throughout the disruptive times caused by a deadly worldwide pandemic. While majority of the industries and companies suffered painful losses and shutdowns, DMart managed to rise above the crowd.

With its own pace of the network roll-out and increased in-store demand, DMart has managed to expand its business by opening 8 more stores. Since the grocery market is dominantly captured by “mom and pop stores” (about 95%), it gives immense space for the retailer to grow 10x than what it is today. 

To defy the argument of expensiveness, if the company continues to grow at the current pace, then the market would assign and price in a 16% long-term earnings compounding, which the company can successfully achieve over a decade’s time.

On the stock front, the stock behaves like a defensive stock when the bear market strikes and outshines when the bull market comes into play.

The above-mentioned points support the arguments for the expected higher valuations of the company and also justifies the potential high growth and an estimated revenue CAGR of 26-27% over a decade.

However, an investor must also factor in the drawdowns the company may face. The price-based competition from ecommerce competitors can put stress on the SSSG and gross margins, keeping up with the pace of network roll out each year and the effect of Covid-19 on the macroeconomics leading to the slowdown of demand.