Sell Avenue Supermarts, target Rs 1,010: Kotak Institutional Equities

Kotak Institutional Equities has retained 'sell' recommendation on Avenue Supermarts (D-mart) with a fair value of Rs 1,010.

Shares of Avenue Supermarts traded at Rs 1,461.45 around 1 pm on 17 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

"Rich valuations and impending share issuance drive our sell rating," said the brokerage.

Dmart posted strong Ebitda growth of 41 per cent year-on-year (YoY). This was partly aided by Ind-AS 116 implementation, which resulted in reduced rental expense but higher interest and depreciation charge.

Ind-AS 116 implementation was largely PBT neutral for Dmart, hence PBT increase is the right metric to track for the company in FY20.

"We adjust our model to bake in the impact of Ind-AS 116. This results in reduced operating expenses and hence a nearly 3 per cent increase in Ebitda," said the brokerage.

"We further assume a right-to-use asset to be created in the balance sheet and an associated liability. We note this accounting change has no impact on cash flows, and thus despite the 1-2 per cent cut to FY2021-22 PAT, our fair value increases to Rs 1,010 (Rs 965 earlier) as we roll forward to June 2021E," the brokerage added.

D-mart will embark upon its capital-raising program post a shareholders’ approval in the ensuing AGM (expected in August 2019).

Reduction in promoters’ shareholding to 75 per cent will entail a capital raise of nearly Rs 6,100 crore (at the current market price) in the next eight months via a mix of QIP and stake sale, said the brokerage.