Shares of Avenue Supermart, the operator of the DMart supermarket chain, fell in early trade today after analysts slashed the company's profit and revenue outlook for the next two years. The analysts, who cut their estimates for the company after weak second quarter results, however remain optimistic about the company's medium-to-long term prospects.
The stock was down 2.6% at Rs 3,835.55 rupees on the National Stock Exchange at 9:49 AM.
Antique Stock Broking was one of the few who downgraded DMart on the results. However, nearly all analysts slashed their estimates for the company's earnings and revenues for this year and the next.
Antique brought the stock down to a 'Hold' citing poor performance by the chain in the category of general merchandise, such as garments and electronics. It marginally cut its target price to Rs 3,893 from Friday's closing price of Rs 3,893.
Among those who slashed their estimates for the company's earnings are Motilal Oswal, Centrum and Nuvama. Prabhudas Lilladher was an outlier, and not only retained its 'Buy', but also increased the target price to Rs 4,724 from Rs 4,576.
Worries Over Weak Results
On Saturday, Avenue Supermarts announced a 18.5% YoY growth in standalone revenues to Rs 12,307 crore, driven by new store additions. However, EBITDA grew only 12% YoY to Rs 1,001 crore due to lower sales contribution from high-margin General Merchandise and Apparel (GM&A) segment.
Analysts said the revenue growth was driven by store expansion in existing clusters and stabilization of larger format stores opened over the past 2 years.
However, Avenue Supermart's overall revenue growth lacked the pre-covid momentum. On a 4-year CAGR basis, Q2 revenue grew by 20%, below the 30%+ growth seen before pandemic.
Most of the topline growth this year was due to store additions, and like-to-like growth for the first half was more modest at 9%. However, like-to-like sales growth was just 0.5% in FY23.
"Avenue Supermarts’ (DMart) 2QFY24 performance was primarily affected by the underperformance of general merchandise, which in turn led to a 52 bps YoY drop in gross margin to 14%. During 1HFY24, the general merchandise share of revenue dropped to 23.2% from 24.8% in the previous corresponding period," noted Antique Stock Broking in its report on the results.
The broker, which has a 'Hold' on the stock, noted that the company parameters such as number of bills generated and sales per square feet witnessed healthy growth.
"In our view, recovery in general merchandise [footwear, clothes, electronics etc] remains the key to DMart’s revival in earnings growth...in view of the muted performance of general merchandise and overall gross margin, we cut our FY24 and FY25 EBITDA estimates by 8% and 7% respectively," it noted.
Nuvama Research highlighted that footfall recovery along with sales per sqft growth indicates demand stabilization. It noted that this recovery is not accompanied by better product mix, with staples such as grocery making up most of the growth.
Prabhudas Lilladher noted that average sales per store increased by 6.5% in Q2, but expects no immediate boost. "We believe that the loss of sales in Apparel is structural as value formats like Zudio and Reliance Trends have reduced the consumer appeal of Hypermarts," it said, adding that it expects the chain to add 45 stores in FY24.
Margins and Profitability
While demand trends seem to be recovering, analysts were more worried by the structurally lower contribution of general merchandise segment, which continues to impact DMart's margins.
Motilal Oswal highlighted that lower consumer spending in this segment has kept gross and EBITDA margins under pressure.
Centrum Broking also cautioned that recovery in this segment remains a key monitorable for margin improvement going forward.
Due to adverse product mix leading to subdued general merchandise sales, DMart’s gross margin contracted by 88bps YoY to 14.3% in 1HFY24. Consequently, EBITDA margins also dropped by 89bps YoY to 8.3% during the same period.
Hence, most brokerages cut their FY24 and FY25 earnings estimates for DMart by 4-8%.
Outlook and Commentary
Brokerages turned cautious on the outlook for Avenue Supermart due to uncertainty around a quick bounceback in performance of general merchandise segment. While they differ on the timeline, nearly all expect the company's margins to bounce back.
Nuvama was one of those that said the company is likely to take longer than expected to see its profit recover.
"The miss on performance, coming especially from lower gross margins, is concerning as it could point to a structural shift or a much longer than anticipated journey back to earlier GM&A mix/ pre-covid trajectory," it noted.
Motilal Oswal and Centrum remained bullish on DMart's long-term prospects. Motilal Oswal retained 'Buy' rating stating that worst seems nearly over for DMart. It expects foods and grocery segment to drive growth and profitability recovery going forward.
"The recovery in revenue/sqft and the reducing gap between revenue/store and revenue/sqft further implied that the share of larger-format stores improved and this remained a key positive. This, along with moderating inflation and onset of the festive season may help in reviving discretionary demand and consequently improve the same store sales trend," it said.
Similarly, Centrum reiterated 'Buy' rating expressing confidence in DMart's execution capability. It expects 25% revenue CAGR over FY23-25 aided by store expansion and revenue productivity gains.
Prabhudas Lilladher was the most bullish on the company's near-term growth prospects. "We believe worst seems nearly over and Food and Grocery segment is expected to drive rebound in sales and profit growth in coming quarters. We estimate 10% EPS growth in FY24 but 27.3% CAGR over FY24-26.
"D’Mart has a huge runway to grow with 1500+ store potential in duopoly market and scale up in D’Mart Ready," it said.