Kotak Institutional initiates coverage on Avenue Supermarts with 'sell'

Mumbai: Kotak Institutional Equities has initiated coverage on supermarket chain D-Mart's owner Avenue Supermarts with a 'sell' rating and a target price of Rs 580.

While the business model is superior, the stock is trading at 46 times estimated FY19 earnings, which is expensive, said Kotak.

"We expect Dmart to report healthy revenue, EBITDA and PAT CAGR of 26%, 28% and 35% over FY2017-20 led by robust SSSG (same store sales growth), sustained addition to store count and steadily improving margins. EBITDA margin expansion and repayment of debt post the recent fund raise in the IPO will lead to sharp expansion in PAT margins from 3.3% in FY2016 to 3.7% in FY2017 and 5.4% by FY2020," said Kotak in a report to clients today.

The brokerage said that strong revenue growth, stable margins and steady pace of store addition will drive the company's free cash flow generation from FY19 onwards.