Avenue Supermarts’ super start to the year may not be sign of things to come2 min read . Updated: 15 Jul 2019, 11:05 PM IST
- Even after adjusting for Ind AS 116 related changes, Ebitda margin improved on a year-on-year basis, say analysts
- Avenue Supermarts’ shares rose up by almost 5% on Monday
India’s retail poster boy, Avenue Supermarts Ltd, put up an impressive show during the June quarter with its margins expanding after three consecutive quarters of contraction. Not surprisingly, investors heaved a sigh of relief, taking the shares up by almost 5% on Monday.
Avenue Supermarts runs the DMart supermarket chain of stores. However, with the country going through a consumption slowdown, a key question on investors’ minds would be whether the company displays enough resilience during these tough times.
“The ongoing slowdown in consumption and higher competitive intensity in grocery retail should restrict growth in calculated sales per square feet to 7% in financial year 2020 from 13% in FY19," said analysts in a note from Systematix Shares and Stocks (India) Ltd.
While investors will closely track how that pans out in the coming quarters, Avenue Supermarts’ revenue growth of nearly 27% in the June quarter is nothing to sneeze at.
Of course, it should also be mentioned in the same breath that high growth rates are an imperative for the DMart share, which is one of the most expensive stocks in the country. It now trades at a whopping 74 times estimated earnings for FY20.
FY20 has started on an optimistic note for the company. The expansion in Ebitda (earnings before interest, tax, depreciation and amortization) margin in the June quarter will soothe investor anxiety about pressures on profitability to some extent.
This was aided by an expansion in gross margins, again after three continuous quarters of decline. Plus, Indian Accounting Standard (Ind-AS) 116 related changes also helped. For the June quarter, Ebitda margin increased by 104 basis points over the same period last year to 10.3%.
However, analysts said that even after adjusting for the impact of Ind AS 116 changes, the Ebitda margin improved on a year-on-year basis. A basis point is one-hundredth of a percentage point.
Investors would watch whether the margin trend sustains. “While DMart’s gross margin improvement has led to steady earnings growth, our channel checks indicate that pricing points across other retailers are in a similar range," said analysts from Motilal Oswal Financial Services Ltd in a report on 15 July.
In other words, competition is tough. “We have factored in gross margin/ Ebitda margin at 15%/8.9% (for FY20), about 100 basis points lower than 1QFY20 levels, given the ongoing hyper competitive intensity," said the report.
The margins of the first quarter are not typically a reflection of the entire year, according to Avenue Supermarts.
“Gross margin was slightly ahead of our expectations and our continued operational efficiency has resulted in higher profit after tax margins," said the company.
Even as the year has started well, the road ahead is not a smooth one. To that extent, Avenue Supermarts’ investors are likely to remain slightly cautious.