DMart owner Avenue Supermarts' Q3 net profit growth slowest in 8 quarters

While topline for the quarter grew well, profit growth remained flat due to gross margin reduction on account of price cuts, says CEO

Avenue Supermarts, which operates the DMart chain of stores in India, reported its slowest net profit growth in eight quarters as the company grappled with growing competition in grocery retail.

For the three months ending December 31, 2018, the company on Saturday reported a 2.1 per cent net profit growth only, touching Rs 257 crore — lower than the Bloomberg consensus estimates of Rs 295 crore. 

Revenue for the quarter was in line with Street estimates at Rs 5,451 crore, a year-on-year growth of 33 per cent as the company continued to cut prices aggressively to attract consumers. But, margins suffered as a result of this strategy, said Abneesh Roy, senior vice-president, research (institutional equities), Edelweiss. The company also admitted this while announcing its results to the stock exchanges.

Neville Noronha, chief executive officer and managing director, Avenue Supermarts, said in a statement while topline for the quarter grew well, profit growth remained flat due to gross margin reduction on account of price cuts. 

“We constantly strive to give better prices to consumers and our cost leadership allows us to do that,” he said. Earnings before interest, tax, depreciation and amortisation (Ebitda) also grew at a slower pace in Q3 (7.5 per cent year-on-year) to Rs 453 crore as the company incurred expenses across infrastructure and people.

Analysts said the number was below their expectations, since most of them had factored in an Ebitda of Rs 492 crore for the quarter. Ebitda margins contracted for the second straight quarter, down 200 basis points in Q3 to 8.3 per cent. In the September quarter, Dmart’s Ebitda margins had shrunk 110 basis points year-on-year to 8 per cent, prompting its stock to tank nearly 7 per cent a day after the results were announced.

Roy said he expected investors to react negatively to DMart’s results on Monday when trading will resume for the week.  “The organised retail market is undergoing a churn with online and offline players undercutting each other aggressively. DMart has no option but to respond to these changes to ensure footfalls,” he said.

While the company did not give an indication of same-store sales growth for the third quarter, analysts estimate it to be in the region of 15-18 per cent. Store additions for the quarter under review were four, taking total count to 164.