Whalesbook
Valuation Concerns Drive Downgrade
Analysts are warning about Avenue Supermarts (D-Mart), downgrading its rating to 'Underweight' even as the company reported strong financial and operational results for the fourth quarter of FY26. This change is largely due to the stock's very high valuation, which many in the market see as too high and unlikely to last. Despite a 21% stock price rise since January 2026, far outpacing the Nifty 50's drop, the current share price seems disconnected from its real value. More analysts are recommending investors take profits, highlighting the difference between D-Mart's strong growth and its stock market value.
Strong Q4 Performance Fuels Growth
The strong performance in Q4 FY26 was driven by fast store expansion, with D-Mart opening 58 new stores to reach 500 by fiscal year-end. This expanded its reach to 17 states. Revenue rose 19% year-on-year, partly due to a short-term rise in consumer purchases in March 2026, linked to geopolitical events. Stores open more than two years showed healthy growth of 10.8% in same-store sales. The number of bills processed also grew by 13%, indicating the average purchase value grew by a mid-single digit percentage. Gross and operating profit margins improved by 40 basis points, helped by less discounting.
Analysts Weigh Valuation Against Growth
While D-Mart's operations are strong, analysts are focused on its valuation multiples compared to other companies. D-Mart's earnings multiple is around 100 times trailing earnings, and projected at 73 times for FY28. This is much higher than Reliance Industries' multiple of around 22-24 times, and value fashion retailer V-Mart trades at about 37.3 times earnings. This large difference contributes to the argument against the stock. The retail sector is seeing a broad recovery, with consumer companies expecting strong Q4 growth, but high competition remains a concern. The fast-growing online grocery (quick commerce) sector, where D-Mart Ready operates, is highly competitive, with players like Blinkit, Swiggy Instamart, and Zepto dominating a market worth $3.05 billion in FY24. This sector is now focusing more on profit than rapid growth, a trend that may affect D-Mart Ready's strategy, as its operations have been reduced from 25 to 18 cities. The geopolitical events that boosted March's consumer buying also carry risks; wider economic worries and possible supply issues are causing consumers to reduce spending on non-essentials and focus on necessities.
Key Risks for D-Mart
D-Mart's main risk is its high valuation. An earnings multiple over 100 times for the past year and 73 times for projected FY28 earnings suggests the market expects significant future growth, leaving little room for mistakes. This high price is hard to justify compared to competitors like Reliance Retail, which have much lower earnings multiples. D-Mart's rapid store expansion, while boosting sales, creates margin pressures. New stores are usually less profitable, and higher depreciation and interest costs hurt profits. High competition, especially from quick commerce companies, also threatens profit margins. The reduction in D-Mart Ready's operations from 25 to 18 cities points to challenges in its online business, a key growth area. The March consumer spending boost was temporary and driven by geopolitical events; it is unlikely to support future performance. Wider economic sentiment suggests consumers will remain cautious, focusing on essentials and limiting non-essential spending.
Analyst Outlook Mixed
Analysts have mixed views. Some maintain positive ratings and price targets, citing long-term growth potential from store expansion. However, many others, who have downgraded the stock to 'Underweight' or 'Sell', think valuations are too high. Average analyst price targets suggest the stock could fall from its current level. D-Mart is expected to keep its high-teen revenue growth over the medium to long term, but analysts expect margins to remain stable, not grow. This means that the advantages of scale might be canceled out by costs from rapid expansion and competition, leading to earnings growth that matches revenue growth.