Radhakrishna Damani will reduce 1% stake in DMart; Should you invest in the stock price?

Veteran Mumbai investor Radhakishan Damani became India’s new retail king after the launch of his supermarket chain D-Mart aka Avenue Supermarts (ASL) in March 2017. Forbes describe Damani as 151th Billionaires globally with networth of $10 billion and also he is 12th richest man in India. Damani who got into retail business with only one store has been unstoppable and DMart’s IPO was one proof of his success. However, tables have turned now, as Damani has revealed his intention to sell 1% stake in DMart. The news led to worst day for the company on stock exchanges, as they plunged by more than 8% last week.

In a notification, ASL stated that, Damani one of our promoter has conveyed to us to his intention to sell the equity shares of face value of Rs 10 each of the company to enable us to comply with requirement of minimum public shareholding.

Up to 1% of the total paid up equity share capital of ASL aggregating to 6,240,844 shares will be sold by Damani. The company also revealed that Damani proposes to divest part of his shareholding in the ASL.

Promoters together hold 82.2% stake in ASL, from which Damani has majority stake in ASL up to 39.41% as on March 2018, followed by Bright Star Investment on second spot by holding 14.22% stake. There is also HDFC Trustee company, Ignatius Navil Noronha and Axis Mutual Fund Trustee limited who have minority stake of 1.24%, 2.2% and 1.18% respectively in ASL.

Remaining entire stake in ASL is held by Damani’s other company and his family members. Together the Damanis hold 67.95% stake in ASL.

Public shareholding in ASL is at 10.54% as on March 2018.

Now this was taken well by investors, as ASL tumbled by 8.42% on Friday before ending at Rs 1,416.85 per piece on BSE.

ASL has been not only a stellar performer in IPO subscription but also on stock exchanges when it got listed.

ASL became the first company in twelve years to get listed at a premium of over 100% in 2017. Not only this, ASL was also third highest IPO to get subscribed over 100 times.

Since the time of listing on March 21, 2017, ASL has gained by a massive 413% on BSE compared to their issue price. On April 30, 2018, the company had touched a new high of Rs 1,534 per piece.

Following such blockbuster performance, investors found the new of Damani’s 1% stake sale as shocking.

The stake sale is expected to complete anytime between May 21, 2018 to June 14, 2018.

Interestingly, when ASL announced it’s fourth quarter ended March 2018 result, analysts have started reducing their target for the company’s share price. And now that Damani’s stake sale can hamper the ASL stock price.

Avi Mehta, Percy Panthaki and Kunal Shah analysts at IIFL Research said, “We cut our FY19ii/20ii EPS by 4/5% to factor in the 4Q miss. DMart’s inability to sustain merchandise mix going forward (share of high margin general merchandise sales in FY18 increased 160bps to 28.4% while that of low-margin foods moderated to 51.6% from 53.3%) remains a risk to our 27% FY18-20 EPS Cagr estimate. REDUCE.”

IIFL reduced target price of ASL to Rs 1,200 per piece in 12 months down by 19% from current market price.

Amnish Aggarwal and Nishita Doshi analysts at Prabhudas Lilladher has also reduced the target price by 32.7% to Rs 1,003 per piece in next 12 months.

However the duo at Prabhudas still believes that D’Mart is creating future engines of growth.

The duo listed out four factors - firstly accelerated store openings to 24 in Fy18, secondly added just 3 stores in mature clusters of Maharashtra and Gujarat and focused more on less penetrated clusters, thirdly acquired 50.8% stake of promoters in E‐Commerce JV and and lastly increased proportion of higher margin general merchandise and apparel by 160bps.

Therefore they add, “Although expansion into new clusters and E‐com can lower near term margin expansion, medium term strategy seems intact. “

Richard Liu and Vicky Punjabi  analysts at JM Financial said, “ We remain bullish; any weakness in stock price should be used as an opportunity to add positions in what we believe to be a best-in-class cashflow-backed earning-compounder.”

Well how ASL stock price performs will be keenly watched.  However, the company has faced tough times earlier and came back strong.