Radhakishan Damani-Backed DMART Stock Corrects Below Rs 4,000 After Q3 Update; Motilal Oswal Gives Buy

Billionaire Radhakishan Damani's largest stock holding is DMART of which he is the founder. A behemoth retail chain that was founded as a small store in 2002 in the residential suburb, Powai of Mumbai, has come a long way since listing on the stock exchanges. But on January 3rd, DMART shares made a sharp fall of 4% and corrected below Rs 4,000 despite strong revenue growth in Q3FY24. The latest drop in stock price brings the opportunity of 'BUY-ON-DIPs' as brokerage Motilal Oswal has recommended buying for a target price of Rs 4,400, implying a 12% potential upside ahead from the current price.

On January 3rd, DMART shares ended at Rs 3,933.85 apiece, nosediving by Rs 171.50 or 4.2% on BSE. The market cap of the company now stood at Rs 2.56 lakh crore. In the previous session, the stock price enjoyed over the Rs 4,105 mark.

Sharp selling in DMART comes after its Q3FY24 update. The company reported revenue from operations at Rs 13,247.33 crore in Q3FY23, which was significantly higher than revenue of Rs 11,304.58 crore. Not just that, DMART's Q3 revenue has increased by more than 78.2% from revenue of Rs 7,432.69 crore in the December quarter of 2020.

The total number of stores as of December 31, 2023 stood at 341.

Why the latest fall brings buy-on-dips opportunity in DMART shares?

The reason behind the downfall in DMART shares is that the company's revenue growth is below estimates and softer on a quarter-on-quarter basis. Also, its productivity has been moderate.

In its brokerage report, Motilal Oswal explained that Dmart's Standalone revenue for 3QFY24 grew 17% YoY to Rs 132.5b (5% below estimate), driven by 5% growth in revenue per store to Rs 1,565m
(annualized) and 11% store addition. On a sequential basis, revenue grew 8%, led by 5% growth in revenue per store and merely 1% store addition. Revenue per sq. ft. rose 4% YoY to Rs 37,782.

In terms of revenue per square foot, Motilal's note highlighted that it recorded moderate growth of 4% YoY in Q3FY24.

Motilal's research report pointed out that in the last three years, DMART remained subdued due to the addition of larger stores and weak discretionary spending. This trend has been gradually reversing for the last 2-3 quarters, which is evident in the reducing gap between the revenue per store growth and revenue per sq. ft. growth in the last 3 quarters (Revenue per sq. ft. improved from Rs 31,807 in 4QFY23 to Rs 35,869 in 2QFY24). However, in 3QFY24, the trend was impacted, with revenue per sq. ft. growth at 4% being lower than revenue per store growth at 5%.

Furthermore, the brokerage's FY24 estimate stands at 40 store additions, with the majority of the store adds being back-ended. However, this appears to be a bit tall task, with 23 store adds in 4QFY24.

Nevertheless, the brokerage has still recommended buying DMART shares for a target price of Rs 4,400 apiece. In the coming quarters, demand is expected to gain traction in DMART.

According to Motilal, while the shift in the festive season was expected to benefit, the industry-wide commentary has indicated a persistent slowdown in the discretionary category in 3QFY24, which may be still hurting the nonfood category (25-30% of revenue). However, softening RM prices should drive demand in the coming quarters.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.