DMart scales Rs 2 trn market cap after strong festival-driven Q3 show

Upsides could be capped in the near term on margin pressures

After two quarters of double-digit revenue decline, Avenue Supermarts returned to the growth trajectory, posting better-than-expected performance in the December quarter of financial year 2020-21 (Q3FY21). Led by festive sales in October and November, the company reported 10 per cent growth in Q3 over the year-ago quarter. 

While the company indicated that overall sales and mix are heading towards pre-Covid levels, December was a disappointment with same store sales declining 4 per cent for stores that were two years and older. About three-fourths of its 221 stores have been in operation for over two years. While the company added a new store in the quarter, store count is up 13 per cent year-on-year (YoY).

The company highlighted that restrictions on store operations in some cities after the festive period led to lower December sales. However, that was still an improvement from the over 12.5 per cent fall in Q2.

Sales in Q3 were led by higher billing per customer with consumers 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. The company is also increasing its general merchandise in the online space with the inclusion of home furnishing, small electrical items, and kitchen aids. DMart Ready, however, is still a small part of consolidated revenues (1-2 per cent) and is making losses at the operating level.

Despite an inferior mix with sales tilted towards staples and fast-moving consumer goods (FMCG), 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 a six-quarter high, the company may struggle to maintain that. 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.

On the product mix front, the company highlighted the sluggish offtake of out-of-home segments such as apparel, laundry, footwear, travel among others. Given that these could take time to hit their peak, the mix could remain adverse in the near term, away from these higher margin segments and towards the staples segment.  

Analysts are confident about the growth opportunities for the company fueled by expansion in the online and physical retail formats as well as a strong balance sheet. Grocery retailers such as DMart were able to recover faster than other retail segments and could gain market share in the near term as competitive intensity reduces (Future group). Motilal Oswal Research expects revenues and operating profit to grow at 23 per cent each over the FY20-23 period.

The company’s expansion and growth trajectory are, however, fully factored into valuations. At the current price, the stock is trading at over 75 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.