Muted fourth-quarter show to may cap upsides for Avenue Supermarts

Growth in the quarter has largely come from store additions

India’s largest listed retailer by market capitalisation posted a lower than expected sales performance in the March quarter (Q4FY22). Revenue for Avenue Supermarts, which runs the Dmart chain of stores, was up 18 per cent y-o-y to Rs 8,606 crore (down 5 per cent sequentially) pegged back by initial impact due to Covid at the start of the quarter.

Even after factoring in some impact of the Omicron Covid variant, the company reported a soft revenue performance, believes Motilal Oswal Research. Growth over the March 2020 quarter which had nine days of lost sales was just under 39 per cent. On a three year annual basis, growth is at 20 per cent.

A large part of the growth has come from new stores which have been added to the network. Store addition at 21 is its highest ever in a quarter taking the total store count to 284 stores with an estimated total area of 11.4 million square feet. Revenue per square feet for the March quarter has declined by 8 per cent y-o-y to Rs 7,950 per square feet and is 12 per cent below March 2019 levels of Rs 9,000 per square feet.

Say analysts led by Anand Shah of Axis Capital, “Prima facie, the numbers appear to be disappointing given the fact that the sales per square feet was aided by multiple rounds of price increases taken in various products retailed by the company, in addition to the price increases taken in 9MFY22. These seem to have been negated by the Omicron-led restrictions on footfall.”

In addition to revenue growth, the street will focus on margin trajectory. The company is expected to report a marginal expansion in operating profit margin. Analysts at YES Securities believe while the Covid impact will reflect in January sales, margins will be under pressure led by operating cost of Dmart Ready business and inferior mix due to higher inflation. They expect margins to be 80 basis points lower on a sequential basis.

Profitability will however improve in coming quarters on the back of a recovery in footfalls, improvement in product mix and higher volumes. A tilt towards staples and essentials during the pandemic hit margins and this trend should reverse with a higher share coming from the general merchandise segment that fetches higher margins.

The stock has corrected by 14 per cent post its December quarter results. However, Axis Capital believes that valuations remain rich at 78 times its FY24 earnings estimates. The improvement in margin trajectory and scaling of online presence (DMart Ready accounts for just under 2 per cent of revenues) will be key things to watch out for going ahead.