Avenue Supermarts, which owns and operates the retail chain D-Mart, reported a jump of 64.13 percent year-on-year (YoY) in its consolidated net profit at ₹685.71 crore for the July-September quarter for FY23 (Q2FY23). It posted a net profit of ₹417.76 crore in the corresponding quarter a year ago.
Its revenue from operations rose 36.58 percent to ₹10,638.33 crore during the quarter under review as against ₹7,788.94 crore in the same quarter last fiscal. However, the profit and revenue were below Street expectations.
The company's revenue per store was up 9 percent YoY versus pre-Covid, but revenue/sqft was still 10 percent below the pre-Covid level at ₹33,727 in Q2FY23 on the back of large store size that reduced revenue/sqft and the adverse impact of inflation on discretionary category (general merchandise and apparel).
The company continued with its store addition momentum and added eight stores in Q2FY23 and 18 stores in H1FY23. Its consolidated gross margin expanded 20 bps YoY and stood at 15.1 percent (40 bps below estimate) due to a lower share of the non-food category.
The retailer's consolidated EBITDA, meanwhile, came in at ₹890 crore, up 33 percent YoY. However, its EBITDA margin stood at 8.4 percent, 20 bps lower than Q2FY22 mainly because of the aggressive store adds.
Stock price trend
Shares of Avenue Supermarts fell as much as 3.7 percent to its intra-day low of ₹4,145 on Monday after its earnings missed analysts' estimates. The stock has lost nearly 20 percent in the last 1 year and 11 percent in 2022 YTD.
Just in October so far, the scrip has fallen 5 percent, extending losses from its 3 percent decline in September. However, the stock surged 7 percent and 25 percent in August and July, respectively.
In the 10 months of 2022, the stock has been in the red in 6 of those months, falling the most in June, down 14 percent followed by in January, down 12 percent. Meanwhile, it rose the most in July, up 25 percent, as mentioned earlier.
Brokerages remain divided on DMart post its September quarter earnings. Let's take a look at what various brokerages have to say:
The brokerage maintains its neutral rating on the stock with a target price of ₹4,100, indicating a downside of around 1 percent from the current market price.
As per the brokerage, the recovery of revenue per store indicates that DMART has reached above the pre-Covid level; however, nearly 20 percent higher average store size and weak demand in the non-food category are impacting revenue productivity adversely on a per-sqft basis.
The brokerage raised its FY23E store additions to 45 from 40 earlier backed by its continued strong store addition trajectory (18 store adds in 1HFY23). It also estimates FY22-24E EBITDA and PAT CAGR of 45 percent and 51 percent, respectively with a 19 percent footfall CAGR.
"We are cognizant of the prominence of new-age grocery models, their rich valuations, and soft management commentary on the non-food category as well as lower revenue per sq. ft. in the last few quarters. Subsequently, we value the company at 50x EV/EBITDA on an FY24E basis and maintain our Neutral rating on DMART with a TP of ₹4,100, given its expensive valuation," said the brokerage.
The brokerage maintains its buy call on the stock with a target price of ₹5,121, indicating an upside of 23.5 percent from its current market price.
The brokerage said that it remains confident of the long-term growth story of DMart led by aggressive store expansion and strong demand recovery in the coming festive season. Hence, it retained a 'Buy' rating on the stock.
"Average system-wide sales/store at ₹35.7 crore were 8 percent higher than Q2FY20, despite store additions in the past 6 months. The discretionary non-FMCG is on a recovery track, although lags behind the pre covid levels. Currently, footfalls are lower than pre-covid levels and basket values are high. As the footfalls improve, the discretionary non-FMCG segment is expected to do better," explained the brokerage.
DMart maintained it gross margins at 15.1 percent while EBITDA margins slipped by 29 bps YoY led by high other expenses. The brokerage estimates 39 percent YoY PAT growth for the 2nd half of FY23 and 42 percent PAT CAGR over FY22-25. It believes DMart has a huge runway to grow with 1500+ store potential (current stores 302) in a consolidated market of modern retail trade, gradual scale-up in D’Mart Ready, and an increase in the share of the general merchandise and apparel segment.
The brokerage has a 'buy' call on the stock with a target price of ₹4,535, indicating an upside of 9 percent.
"The stock could take a breather on the back of the Sep-Q report that was relatively lackluster. Normalised growth in sales per store (3-year CAGR) improved a tad to 3 percent versus 2 percent seen in recent few quarters. As per management, the number of new stores added (new stores have much lower sales vs older ones) and the profile of the cities for newly-opened stores could be a few reasons why the blended average isn’t as strong as what one used to see during earlier periods," said JM.
Also, the profitability profile hasn’t had the same uplift this time round as was seen during the June quarter - this led to a 9 percent miss as far as the brokerage's estimates go. Disappointing September quarter result notwithstanding, it still views DMart as one of the best earnings-compounders in the space – it believes the business’ long growth runway can help the stock deliver a double-digit return over the coming five years even if current PER of >100x NTM EPS drops to 55x, which is quite an ‘acceptable’ consumer multiple now, during that period, noted the brokerage.
The brokerage has a 'sell' call on the stock with a target price of ₹2,950 per share, indicating a downside of 29 percent.
"DMART’s unit economics remains sub-optimal vis-à-vis pre-pandemic days (partly attributable to the step-up in store additions/size). While we factor in recovery for FY22-24, this assumption stands at risk, given the heightened competitive intensity from deep-pocketed retailers. Hence, we maintain 'Sell' on DMART with a DCF-based target price of ₹2,950/share, implying 34x FY24 EV/EBITDA for the standalone business + 4x FY24 sales for DMART Ready.
Higher bill sizes along with lower footfalls aid FMCG profitability/productivity but are a sign of more targeted shopping with little room for discovery-based purchases (courtesy of inflationary pressures), which in turn make a dent in the more profitable gross margin and apparel sales, the brokerage further noted.