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Photo: Indranil Bhoumik/Mint
Photo: Indranil Bhoumik/Mint

DMart’s sequential recovery falls short of investors’ expectations

  • The company maintains that there has been a month-on-month improvement in sales with August being better than July and September being better than August

For a stock that trades at an exorbitant multiple of 149 times trailing twelve month earnings, Avenue Supermarts Ltd’s September quarter results are a bit disappointing. Avenue, runs the DMart chain of retail stores, reported a 12% drop in revenues year-on-year.

True, the company’s last quarter results show a reasonable recovery compared to the June quarter, which was impacted far more because of lockdowns. Revenues had fallen almost 34% in the June quarter.

While the month-on-month improvement in sales has continued, some analysts are disappointed that same store sales were still about 12% lower year-on-year in the month of September.

“DMart’s September quarter operating performance was a negative surprise to us, especially since total revenue had already recovered to about 80% of base level by the month of June; to that extent, a 11-12% yoy decline for full September quarter was much steeper than what we envisaged," analysts at JM Financial Institutional Securities Ltd said in a report on 17 October. The 12% decline in revenues in Q2 is despite a retail space increase of about 25% year-on-year, analysts at Credit Suisse Securities (India) Pvt Ltd pointed out in a 19 October note.

Good but not enough
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Good but not enough

Of course, with social distancing being the norm, it appears foolhardy that analysts were expecting a better performance to start with. But as pointed earlier, with valuations being as high, earnings expectations tend to follow suit.

DMart’s earnings before interest, tax, depreciation and amortisation (Ebitda) margin had declined sharply by 750 basis points year-on-year in the June quarter to 2.8%. One basis point is one hundredth of a percentage point. There was an improvement in the September quarter with Ebitda margin contraction of 244 basis points to 6.2%.

Margins continue to be lower on a yoy basis as operating leverage has been hit with revenues declining. Plus, product mix was weaker. The contribution of sales of General Merchandise and Apparel was lower comparatively at 22.7% of revenue compared to 27.3% for FY20. Typically, margins for this segment are higher for DMart.

The company added six stores during the quarter, while two stores were closed and converted into fulfilment centres for e-commerce business. After Mumbai, DMart has expanded its online segment into select pin codes of the Pune market. “E-commerce venture (is) being accelerated now; but at what cost to the bricks-and-mortar business is unclear," said Credit Suisse Securities (India) Pvt Ltd’s analysts in a report on 19 October.

The Avenue Supermarts stock increased about 5.5% on Monday on NSE. Note that the stock had declined about 9% in the past two weeks until Friday. “Investors who like the stock from a long-term perspective may be seeing current price levels as a decent entry point, especially now that the results are out of the way," says an analyst. DMart shares are about 18% lower compared to its pre-covid highs in February, which is partly driven by increased competition foreseen from e-commerce in general and Reliance Retail Ventures in particular.

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