After strong performance in Q3, near-term margin worries for Dmart

Supply issues, higher raw material costs are headwinds

After two quarters of double digit revenue decline, Avenue Supermarts returned to the growth trajectory posting better than expected performance in the December quarter. Led by festival-led sales in October and November, the company posted a 10 per cent growth in Q3 over the year ago quarter. 

While the company indicated that overall sales and mix are moving towards the pre-Covid levels, the December month was a disappointment with same store sales declining 4 per cent for stores two years and older. About three fourths of its 221 stores have been in operation for more than two years.

The company highlighted that restriction on store operations in certain cities after the festival period due to night curfews and weekend closure led to the lower December sales. However, it is an improvement from the over 12.5 per cent same store sales fall in the September quarter.

Sales are driven by higher billing per customer with customers making fewer trips. Its e-commerce operation, DMart Ready continues to grow on a small base (up 92 per cent to Rs 109 crore) with the company expanding its presence in Ahmedabad, Bengaluru and Hyderabad.

Despite an inferior mix with sales tilted towards staples and fast moving consumer goods, the company was able to improve its operating profit margins by 50 basis points over the year ago quarter to 9.3 per cent. In addition to revenue growth, the company has kept a tight control over costs, with other expenses falling by 7 per cent.

While reported margins are at multi quarter highs, the company may struggle to maintain them. The management highlighted that it is facing inconsistent supplies from the non-FMCG sector and raw material costs too are trending up. Lack of availability coupled with rising prices could impact its volumes and margins in the current quarter.

While analysts are confident about the growth opportunities for the company led by a strong balance sheet as well as expansion in the online and physical retail formats, valuations are factoring these positives. Given that the stock is trading at 68 times its FY23 earnings estimates, Himanshu Nayyar of YES Securities expects a period of consolidation in the stock with investors waiting to see the impact of aggressive online competition in the grocery space.