Home / Markets / Mark To Market /  Store additions key but margin pressure may continue for Avenue Supermarts

For Avenue Supermarts Ltd, which runs the DMart chain of stores, a slower-than expected pace of store additions in fiscal year 2019 has been a sore point. At its analysts meet last week, the company soothed some nerves by acknowledging that new store additions should improve.

The Indian retail bigwig offering everyday low-price products to consumers, added 21 stores last fiscal year, taking total store count to 176. In FY18, DMart had added 24 stores. One of the factors that affected store additions in FY19 was the delay in getting approvals. The silver lining is that DMart is consciously opening large stores, which means growth is higher in terms of area operated by the company. “Store addition should also be looked in the context of area addition—retail trading area grew by 19% compared with 14% growth in store count," wrote Garima Mishra, analyst, Kotak Institutional Equities, in a report on 13 June.

Be that as it may, investors would do well to follow store additions from here on. But this is just one of DMart’s troubles. Margins have been under pressure, as high competition has pushed the company to take price cuts.

The recently concluded March quarter was the third continuous quarter of year-on-year Ebitda margin contraction. Ebitda is earnings before interest, tax, depreciation and amortisation. With little respite on competitive intensity, outlook for margin improvement appears bleak. “DMart is following an aggressive approach with focus to grow volumes and drive margins by operating leverage only. This strategy is like what Asian Paints did in nineties to gain scale and share," pointed out Prabhudas Lilladher Pvt. Ltd in a report on 12 June.

According to Motilal Oswal Securities Ltd, intensifying price competition, higher capex towards new stores and upcoming lease costs will continue exerting pressure on the company’s profit margin. Even as DMart prefers to own its stores, it has said it is also open to further explore the lease model, which is likely to result in increased lease rentals going forward. The broker expects flattish Ebitda/profit after tax margin in FY20-21.

In the past one year, the DMart stock has lost nearly a tenth of its value, suggesting investors have already taken some of these concerns into account. Still, optimism runs high, what with the shares trading at almost 70 times estimated earnings for fiscal year 2020, according to Bloomberg. Agreed, at a time when the consumption theme in India is losing steam, DMart’s FY19 year-on-year revenue growth of 33% is commendable. But with valuations being where there are, the scope for meaningful expansion hereon appears narrow.

View Full Image

Pallavi Pengonda

Pallavi Pengonda is a financial journalist producing cutting edge commentary and analysis on companies, economy and market trends. Over her journalism career spanning more than 14 years, she has covered topics across sectors such as oil & gas, consumer, aviation and new age tech companies. She heads the Mark to Market team and joined Mint in June 2010. She lives in Bengaluru. She is an art enthusiast and likes to paint in her leisure time.
Know your inner investor Do you have the nerves of steel or do you get insomniac over your investments? Let’s define your investment approach.
Take the test
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You


Get the best recommendations on Stocks, Mutual Funds and more based on your Risk profile!

Let’s get started

Trending Stocks

Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout