The upgrade follows ongoing strong results, anticipated same-store sales growth rebound amid reducing inflation, and low valuations.

DMart has traded at 60x EV/EBITDA and 99x PE during the past five years. After a nearly 25% stock price decline since September 2022, the stock now trades at 58x price-earnings multiple and 36x EV/EBITDA, which is a 30% discount to historical multiples. The recent weakness in SSSG was the cause of the correction, and market analysts anticipate that it will rebound in fiscal 2024, which would increase valuation multiples.

The market anticipates a likely recovery in SSSG-driven softening of general inflation, as well as a decrease in the cost of raw materials and the deployment of a new store strategy to address the issue of smaller 30-35k sq ft stores. Larger stores have been added by the corporation since FY19/20, and they continue to add to SSSG even after their initial 3–4 year cycles are over. With the potential to increase foot traffic, this is likely to increase retail productivity.

The brokerage anticipates that after the SSSG recovery, DMart will be able to increase its margin by 30 to 50 basis points or pass the benefits along to customers to increase offtake. DMart has been able to preserve its EBITDA margin despite dismal SSSG, in contrast to other retailers who have faced a 200–450bp margin blow.

The SSSG and earnings revision cycle for DMart appears to be nearing a bottom, in our opinion. Strong store growth and persistent cost optimization may provide SSSG with strong tailwinds as it recovers. Therefore, we anticipate a revenue/PAT CAGR of 27%/29% for FY23–25, according to Motilal Oswal.

According to brokerage expectations, there is no need to be concerned about the burgeoning online grocery sector. This point of view is backed by the fact that only a small fraction of the overall grocery market is accounted for by modern retail and online. As a result, there is tremendous room for growth and opportunity in the market.

Over the past five years, DMart has experienced strong CAGRs of 23% and 24% for both revenues and earnings. We believe it has only just begun after generating a turnover of Rs43,000 crore and growing the topline at such a blistering rate. Since modern retail is still relatively new in India, we think there is plenty of room for expansion, according to market analysts.