Shares of Avenue Supermarts, which operates the DMart supermarket chain, are down more than 3% after the company reported continued decline in its operating profit margins in April-June.
The retail chain posted a consolidated net profit of Rs 659 crore for the quarter, compared to Rs 505.21 crore in the preceding quarter. In the same quarter of last year, the company had net profit of Rs 643 crore.
However, the company disappointed the Street on EBITDA or earnings before interest, tax, depreciation and amortization – a key measure of profitability that strips away the impact of non-operational factors such as tax and interest rate fluctuations and gives a more accurate picture of the company’s performance.
The retailer's EBITDA margin fell to 8.9% this time from 10% a year ago.
The hypermarket chain's profits did not keep up with its sales growth. The company's sales grew 18% YoY to Rs 11,631 crore. However, it reported a mere 2.5% year-on-year rise in net profit.
Motilal Oswal pointed out that gross margin – which indicates the profit left over after deducting manufacturing costs – fell sharply to 15.2% from 16.4% due to lower sales contribution from general merchandise and apparel.
Even store additions have declined. The chain added a much lower number of stores this time compared to earlier, with new store additions falling sharply to 3 from 18 in the preceding quarter and 10 in the year-ago period. The company had a total of 327 outlets as of June 30.
Worried by the trend in the company’s financials, Kotak Institutional Equities revised their estimates for the next three years by 2-6%, based on lower revenue and margin forecasts.
It maintained that the company's revenue was largely impacted due to lower footfalls in stores and relatively lower sales of the general merchandise category. It also noted that traditional retailers like DMart are losing market share to quick commerce and other e-commerce formats. Another reason it flagged for the slower growth was the increased share of new stores in Tier II/III cities, where turnover tends to be lower.
The broker has a SELL rating on the stock and expects the stock to remain in the Rs 3,475 range.
Nuvama too in its reports stated that it was 'a little concerned regarding the company's performance and maintained HOLD status.
Motilal Oswal observed that the adverse impact from the larger-sized stores appears to be bottoming out with revenue/sqft and revenue/store rising 4% YoY and 5% YoY, respectively.
"Robust store additions, healthy cost efficiencies and recovery in discretionary demand could drive growth," it added.
Centrum, however, maintained a BUY rating on the stock and expects the stock to be priced at Rs 5,055 in FY2025.