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Revenue growth was partly helped by store additions, which have been satisfactory with Avenue Supermarts adding seven stores last quarter. Photo: Aniruddha Chowdhury/Mint
Revenue growth was partly helped by store additions, which have been satisfactory with Avenue Supermarts adding seven stores last quarter. Photo: Aniruddha Chowdhury/Mint

Avenue Supermarts’ Q3FY20 doesn’t disappoint; sustainability crucial

  • Revenues have increased by nearly 24% over the same period last year to Rs6752 crore
  • With the company’s size increasing, growth rates are bound to taper

Avenue Supermarts Ltd’s December quarter results, announced on Saturday, are encouraging, especially when consumer demand isn’t upbeat in the country.

Avenue Supermarts runs the DMart supermarket chain of stores.

Revenues have increased by nearly 24% over the same period last year to Rs6752 crore. Of course, with the company’s size increasing, growth rates are bound to taper. For instance, revenue growth for the December 2019 quarter stood at a more robust 33%.

Nonetheless, this year’s performance is nothing to sneeze at. Revenue growth was partly helped by store additions, which have been satisfactory with Avenue Supermarts adding seven stores last quarter. This means for the nine month ended December (9MFY20), 20 stores have been added. This compares favourably with last year when the pace of store addition was slower at nine stores being added in 9MFY19.

Gross profit margins have expanded slightly by 31 basis points. One basis point is one-hundredth of a percentage point. Overall, revision in corporate tax rates has boosted net profit, which increased by 53% to Rs394 crore.

Shares of Avenue Supermarts were trading more than 1% higher on Monday morning. Investors have little to complain about, as the stock has appreciated as much 28% so far this financial year. Avenue Supermarts’ valuations were always pricey. Currently, the stock trades at almost 68 times estimated earnings for financial year 2021, based on Bloomberg data.

“Its consistent superlative performance has ensured strong valuation rerating in the last three years since its listing and resulted in massive outperformance versus market and other retail peers," wrote analysts from Motilal Oswal Financial Services Ltd in a report on 13 January.

However, outlook isn’t hunky dory, particularly with valuations being where they are. “Therefore, the relative moderation in revenue growth coupled with high capex could impact DMart’s return ratios and could compress valuation multiples in our view, despite its continued stellar relative earnings outperformance," added the broker.

HDFC Securities Institutional Equities remain sellers on the counter as it believes that DMART's throughput, cost and working capital efficiencies are near peak, cost of retailing is inching up and well capitalized e-grocers/online biggies (Amazon /Flipkart) are getting price-war-ready as can be seen from the significant bump up in their authorized capital.

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