Why DMart disappoints investors

DMart’s shares are down nearly 30% from their 52-week highs in October 2021. Photo: Mint
DMart’s shares are down nearly 30% from their 52-week highs in October 2021. Photo: Mint


  • Ebitda margin contracted by 166 basis points sequentially to 8.6%. Many had expected it to cross 9%.

Avenue Supermarts Ltd’s September quarter (Q2 FY23) results announced on Saturday have failed to enthuse investors, leading to shares dropping 3.6%. Avenue runs the DMart retail store chain. Standalone revenue performance was already disclosed in the quarterly update released earlier this month and therefore all eyes were on margins in Q2. Furthermore, the company’s recovery on some parameters was also disappointing.

Margins were a sore point. Avenue’s Ebitda margin contracted by 166 basis points (bps) sequentially to 8.6%. One basis point is 0.01%. Many analysts were expecting the measure to surpass 9%. Two key factors impacted its Ebitda performance. First, gross margin was disappointing, partly because of a weaker sales mix, falling by 132bps sequentially to 14.5%, though it improved a bit year-on-year. Second, operating margin was also hit by a sharp jump in other expenses. The upshot is Ebitda fell by 11% sequentially to nearly 895 crore. The company said the fast-moving consumer goods (FMCG) and staples segments performed better than general merchandise and apparel. The latter’s share of revenue is down from 27-28% in pre-covid (FY19 and FY20) to 24.75% in H1FY23. In Q2FY23, in discretionary non-FMCG categories, stress because of inflation is more pronounced at lower price points. Discretionary items in the non-FMCG segment and overall footfalls still lag pre-pandemic levels.

Yet to gther steam
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Yet to gther steam

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The average basket values improved despite lower footfalls, which bodes well for the FMCG segment’s profitability, though this has a negative bearing on the more profitable general merchandise and apparel sales. As of September end, Avenue’s stores that are five years or older saw a decent like-for-like 6.5% compound annual growth rate, versus Q2FY20. However, in a quarter having no covid impact, this is much lower than the pre-covid double-digit trends, potentially hinting at a new normal, a Nuvama Research report on 15 October said. Thus, it remains to be seen if there is a structural shift in consumers’ buying behaviour. As the chart shows, Avenue’s revenue per square feet in Q2 is lower than pre-covid level (Q2FY20).

This indicates, “(1) slower same store sales growth for old stores, (2) slower-than-expected ramp-up of newer stores (five years or less) – the company does not agree with this and maintains that new stores are ramping up well and (3) regional differences in peak throughputs of stores (metro stores in general will have much higher throughput than non-metro stores)," said analysts from Kotak Institutional Equities in a report dated 17 October. Rising competitive intensity is a cause for worry. “We suspect the deteriorating unit economics is not just a function of high inflation keeping discretionary purchases in check but also a consequence of a fair challenge to DMart’s value proposition by deep-pocketed peers within DMart’s top districts," said HDFC Securities. According to the broking firm, working capital days have deteriorated from 22 days to 25 days in three years, despite the essential-heavy mix, which turns faster.

To some extent, investors seem to be aware of the concerns. Avenue’s shares are down nearly 30% from their 52-week highs in October 2021. But this doesn’t mean valuations offer comfort. The stock trades at 81 times FY24 estimated earnings, according to Bloomberg. Notwithstanding growth prospects, many analysts remain cautious on the stock citing expensive valuations. Kotak’s sum-of-the-parts based fair value for the stock is 3725. On Monday, Avenue’s shares closed at 4,153.45 on the NSE.

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