'Buy for 65% upside' — Here's what drives CLSA's 'high conviction' on the DMart parent

Shares of Avenue Supermarts Ltd., the parent company of DMart, gained on Tuesday, December 16, after brokerage firm CLSA reiterated its positive stance on the stock.

CLSA maintained its "high conviction outperform" rating on Avenue Supermarts with a price target of ₹6,300 per share, indicating an upside potential of 64.7% from its the stock's closing price on Monday.

Looking at the free cash flow trends across global retailers such as Walmart, Costco and BIM, CLSA said early expansion years typically witness negative free cash flow due to rapid store additions. As the expansion normalises, the free cash flow turns positive slowly.

DMart could follow a similar trajectory once its store additions stabilise, CLSA said.

India's consumption outlook remains strong and DMart has a deeply moated business model, the brokerage added.

Avenue Supermarts' total number of stores as of September 30, stood at 432.

The company reported its second quarter earnings in October. Its revenue increased 15.5% to ₹16,676.3 crore from the previous year's ₹14,444.5 crore. Its profit was up 3.9% at 685 crore from ₹659 crore last year.

The company's earnings before interest, taxes, depreciation and amortisation (EBITDA) increased 11% to ₹1,213.8 crore from ₹1,093.8 crore in the September quarter last fiscal. Its EBITDA margins contracted to 7.28% from 7.57% in the year-ago period.

Of the 29 analysts that have coverage on the stock, eight have a "buy" rating, 12 have a "hold" rating and nine have a "sell" rating. The consensus estimates of price targets from analysts imply a potential upside of 10.6% from current levels.

Shares of Avenue Supermarts gained 2.2% to hit an intraday high of ₹3,908.5 apiece on Tuesday. The stock was trading 1.6% up at ₹3,887.3 apiece around 10.10 am.

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