Avenue Supermarts Ltd (which runs the DMart supermarket chain) saw year-on-year improvement in gross margin of nearly 140 basis points in its December quarter financial results, a welcome surprise. Neville Noronha, chief executive officer and managing director of the company, says about 50 basis points of the improvement in gross margin is driven by the impact of the goods and services tax (GST) and the remaining 90 basis points gain is owing to better sales mix and efficiency of centralized procurement.

A basis point is one-hundredth of a percentage point.

According to the company, the GST impact also means revenue growth would have been slightly higher than the reported 22.6% increase to Rs4,095 crore. Kotak Institutional Equities was expecting revenue growth at about 28%, so that’s a bit of a disappointment.

The DMart management though has an explanation. It says growth appears lower as compared to the year-ago quarter because of the demonetisation base effect. According to Noronha, revenue growth was 42% in the December 2016 quarter, as demonetisation had a positive impact on the company back then. In fact, fiscal year 2017’s revenue growth was also comparatively higher at 38.5%.

Nevertheless, net profit growth was much faster in the three months ended December 2017, with profits increasing by nearly two-thirds compared to the same quarter last year to Rs252 crore. Profit growth for the last two quarters was helped by faster growth in “other income" and lower finance costs, a consequence of some debt repayment as expected.

The company’s net profit was ahead of Kotak’s estimates.

Nevertheless, the results aren’t going to have a dramatic effect on the DMart share price. The obvious reason is valuations are already expensive. Based on data collated by Bloomberg, the company’s shares trade at an exorbitant 68.5 times estimated earnings for the next fiscal year (FY19). Moreover, after a strong festive December quarter, margins are unlikely to sustain in the current quarter.

In future, faster revenue growth will offer some room for margin expansion. Store additions are one factor that can drive that.

The company is likely to open more stores in this quarter, a trend witnessed in last year’s March quarter. For the nine months ended December 2017, 10 stores were added, out of which five stores were added last quarter. “Speed of opening new stores has to improve. There is an opportunity to do better there," pointed out Noronha in the press statement.

Even as investors keep an eye on revenue growth, given the so-called scarcity premium DMart enjoys and its superior performance parameters, the stock is likely to continue to be in vogue.

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