Radhakishan Damani, the promoter of Avenue Supermart which owns India’s largest listed retail chain DMart, mulls selling a 5.2% stake in the company to raise Rs.5,870 crore.
Damani has approached select investment banks as he prepares to pare his stake next year, according to the media reports.
Damani, who sold about 1% earlier this year, has to sell more shares before the end of March to meet a minimum requirement for a public float.
A 5.2% stake in Avenue Supermarts would be valued at around Rs 5,870 crore ($823 million), based on the closing price in Mumbai on Friday.
The founders hold about 80.2% of Avenue Supermarts, including about 37.4% by Damani.
The public shareholding is below the minimum 25% threshold.
The share sale could come at a time when companies in India are battling weaker consumer demand as Asia’s third-largest economy slows.
Avenue Supermarts shares have gained about 12% this year.
In the fiscal second quarter to September 30, the company reported consolidated sales of Rs 5,991 crore, up 3.03% from last quarter sales of Rs 5,815 crore and up 22.44% from last year same quarter sales of Rs 4,893 crore.
The net profit after tax stood at Rs 323 crore.
Meanwhile, global brokerage Morgan Stanley has maintained an underweight rating on Avenue Supermarts and revised target price to Rs 1,500 from Rs 1,120.
Despite DMart’s robust business model, market expectations for revenue growth and operating margins are high, and leave little room for disappointment, especially in the current weak macro environment
But are current valuations justified and what should investors do?
Dmart which plans to make an OFS soon is also planning yo raise some additional funds to fund its expansion plans ahead
Our expectation is that the OFS which will come at a moderate discount of 7 to 8% will be gobbled up easily by both fiis and local funds as liquidity in the dmart stock is very low and many funds were waiting to participate to accumulate once liquidity improved
On valuations, while we agree that dmart is not a cheap stock it’s future growth and potential over the next 10 years looks very robust and bright as the retail footprint in India is miniscule
More importantly, it caters to the mass market and middle segments of the markets where demand is still strong and where volumes are huge. More importantly, dmart has clearly built a very efficient cost structure which has enabled it to be very profitable despite the fact that margins in the retail business are wafer-thin.
In valuations, we believe that the stock looks attractive only from a long term point of view as most near term positives are already factored into the price. Also, it’s unlikely that the promoters would dilute there stake significantly ahead and keep this at 75% as the company us well funded and cash flow generation is quite strong
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