Markets
DMart’s recovery path is turning weary for investors
Summary
- While store adds and mix has remained weak for many quarters, the worst seems to be behind for DMart, according to experts
Avenue Supermarts Ltd’s recovery has been painfully slow, testing the patience of its investors. The food & grocery retailer, running the DMart supermarket chain, has been reporting lacklustre results for many quarters now. Unfortunately, the three months ended December (Q3FY24) had no big surprises. Standalone Ebitda margin continued to shrink year-on-year for the sixth continuous time, falling 16 basis points (bps) to 8.5%.
A combination of lower gross margin, and higher employee costs and other expenses impacted the Ebitda margin in Q3. Plus, revenue growth at 17.2% was underwhelming as store additions were subdued and sales per store performance dull.
“On productivity, revenue per square feet increased 4% year-on-year to Rs37,728 on an annualized basis but is still 6% lower than the pre covid number of ₹40,101 DMart achieved in Q3FY20," said analysts from Nuvama Institutional Equities.
DMart added five new stores last quarter taking the total count to 341 with a retail business area of 14.19 million square feet. For the nine-month ended December, 17 stores were added vis-à-vis 22 in the same period last year. In view of slower store additions, some analysts have cut their store addition assumptions for FY24.
“While the earning cuts in earlier quarters were driven by muted showing on productivity and lower general merchandise and apparel (GM&A) share, this quarter we have to adjust our store addition guidance downward to 32 from 45 earlier," said Nuvama’s analysts in a report on 13 January. Adjusting for this, the brokerage’s profit after tax estimate for FY24 and FY25 is lower by 1% and 3%.
The encouraging bit from Q3 commentary in Avenue’s press release is that the contribution from the high-margin GM&A segment has stabilized and the trends are encouraging post-Diwali. Note that this segment has been a pain point for the company in the past few quarters, weighing on the overall mix. This can be attributed to competition in the apparel segment from the likes of Trent’s value concept Zudio and Reliance Trends. Moreover, inflationary pressures may have led to consumers tightening their purse strings when it comes to discretionary purchases.
On the other hand, festive season sales for Avenue were below expected in the non-FMCG segment. FMCG is fast-moving consumer goods. “Within FMCG, agri-staples (ex-edible oil) are going through significantly high inflation," said Avenue’s chief executive officer & managing director, Neville Noronha.
Overall, investors are not celebrating Q3 results as such. On Monday, Avenue’s shares were marginally up. Over the last year, the stock’s returns have been flattish versus about a 23% gain in the benchmark Nifty 50 index.
Hereon, investors will watch if the recovery in growth gathers pace and whether the sales mix improves. “While store adds and mix has remained weak for many quarters, the worst seems to be behind, in our view," said Jefferies India’s analysts. They expect the mix to improve as macro headwinds recede.
Even so, significant near-term triggers for the stock are missing. Plus, valuations are not cheap. “Trading at 76 times FY25 earnings per share and a modest growth outlook, we find the risk-reward unfavourable," said IIFL Securities’ analysts. “However, we do not expect much of a downside in the stock; it is more likely that the stock would time-correct," they added.
A faster-than-expected recovery in the GM&A segment and sales growth, along with an improving margin trajectory, would aid sentiments for the stock.
