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Graphic: Santosh Sharma/Mint
Graphic: Santosh Sharma/Mint

Why Avenue Supermarts’ margin growth failed to impress investors

  • Revenue of 5,949 cr in Sep quarter showed a year-on-year rise of  22%, the slowest growth since the stock’s listing
  • Avenue Supermarts runs the DMart supermarket chain of stores

When Avenue Supermarts Ltd reported a 104 basis point expansion in its Ebitda margin in the June quarter, investors had cheered, taking the stock up by 5% in a single day. Ebitda is earnings before interest, tax, depreciation and amortization, and is a key measure of profitability.

Avenue Supermarts runs the DMart supermarket chain of stores.

The good news is, another quarter down the line, margin improvement has continued. September quarter results announced on 12 October showed Ebitda margin expanded by 67 basis points to 8.7%. The margin has improved even after adjusting for Indian Accounting Standard 116 impact helped by a better product mix.

However, investor reaction this time around has been rather tepid. The retailer’s shares declined by 0.82% on Monday, a day when the broader market was in the positive territory. What gives?

For one, even as margin improvement continues, the company’s revenue growth has slowed down. For the September quarter, revenue at 5,949 crore showed a year-on-year increase of 22%, which analysts at Motilal Oswal Financial Services Ltd said was the slowest growth since the stock’s listing. This—despite a healthy addition of 25 stores (13% growth) in the last nine months—indicates slower same-store sales growth, added the brokerage firm. As of 30 September, DMart had 189 stores.

“Revenue growth for the quarter was slightly lower than our estimates while gross margin saw improvement over the corresponding period last year due to better revenue mix," said Neville Noronha, chief executive and managing director of Avenue Supermarts.

However, corporate tax rate cuts helped net profit, which rose 48% year-on-year to 333 crore in the September quarter. The company’s effective tax rate fell to 21% in the September quarter, from 35% in the June quarter.

The corporate tax cut has helped sentiment for the company’s stock and so did the June quarter margin improvement, which came after three consecutive quarters of margin contraction, point out analysts. The Avenue Supermarts stock has surged as much as 34% since the June quarter results. Needless to say, this makes valuations pricey. The stock trades at an expensive 68 times estimated earnings for FY21, based on Bloomberg data.

“We see strong tailwinds for the business (huge growth potential in Indian food & grocery market, sharp value-retail positioning with efficient backend operations and e-commerce initiative), but current valuations offer low margin of safety," said ICICI Securities Ltd in a 13 October report.

Moreover, competition, especially from the likes of Reliance Retail, remains a worry for DMart. Investors will watch revenue growth trajectory closely after the September quarter.

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