Avenue Supermarts declines 5% as Q4 EBITDA margin contracts 68 bps YoY

Analysts at Prabhudas Lilladhar believe D-Mart has higher weakness risk in 1HFY21 given that Covid-19 sensitive clusters of Maharashtra, Gujarat and Telangana constitute 63 per cent of total stores

Shares of Avenue Supermarts, the D-Mart retail chain operator, skid 5 per cent in the early morning trade to Rs 2,282 on the BSE on Tuesday on profit booking after the company’s January-March quarter (Q4FY20) results disappointed investors on the margin front. Earnings before interest, tax, depreciation and amortization (EBITDA) margin contracted 68 basis points to 6.67 per cent in Q4FY20 from 7.35 per cent in Q4FY19, hit by higher depreciation and employee costs.

In the past six months, the stock has outperformed the market by gaining 30 per cent, as compared to a 25 per cent decline in the S&P BSE Sensex till Friday.

The management said margins have seen erosion as regulations did not permit them to sell any apparel and general merchandise products. "The trend rapidly deteriorated in April during which more than half of the D-Mart stores remained closed for operations or operated for extremely restricted hours. As some of the restrictions continue, the company is seeing reduced sales and lower than usual footfalls in its stores," it added.

The company expects the impact of nationwide lockdown to continue in the April-June quarter earnings. "Significantly large EBITDA declines are to be expected due to lower sales, lower gross margins, higher cost of operations on account of hardship allowance to front line staff during lockdown and higher personal hygiene/store sanitation costs," the company said.

Meanwhile, D-Mart reported a single digit-8.3 per cent year on year (YoY)-growth in consolidated profit before tax (PBT) at Rs 333 crore, as against Rs 308 crore in the corresponding quarter of the previous fiscal. Its consolidated net profit grew 41.6 per cent YoY at Rs 271 crore compred with Rs 192 crore in the same period last year.

Revenue from operations during the quarter increased 23.59 per cent YoY to Rs 6,256 crore from Rs 5,062 crore. However, during the month of March 2020, it grew by just 11 per cent over March 2019 due to the lockdown effect of the last 9 days of March this year.

Besides, the management said the full extent to which the pandemic will impact in company’s future financial results will depend upon upcoming developments, which are highly uncertain including any new information concerning the severity of the pandemic and the action to mitigate its spread as advised by local authorities.

Analysts at Motilal Oswal Financial Services have cut EBITDA estimate by 16.8 per cent for FY21E due to half of its stores being closed over Apr–May’20, lower gross margins from increased non-discretionary revenue, and higher opex. However, the brokerage firm maintains its FY22E EBITDA estimates given the sharp recovery expectation as it pertains to non-discretionary.

"The retail companies are expected to see revenue erosion. While 1Q could be a washout, D-Mart could see recovery sooner than other retailers as non-discretionary revenue contributes 72 per cent to the total revenue. D-Mart is well-positioned in terms of both business model and balance sheet to recover from the ongoing turmoil in the economic environment. This is as it caters to a large proportion of low-ticket items and has a strong balance sheet," it added.

"Although D-Mart is a compelling play on Hypermart segment, valuations at 82xFY22 and 65xFY23 with current price justification at 9 per cent terminal growth looks unappealing," analysts at Prabhudas Lilladher said in result update.

The brokerage firm believes D-Mart has higher weakness risk in 1HFY21 (April-September) performance given that Covid-19  sensitive clusters of Maharashtra, Gujarat and Telangana are 63 per cent of total stores and around 75 per cent of sales.

At 09:16 am, Avenue Supermarts was trading 4.5 per cent lower at Rs 2,286 on the BSE, as against a 1.2 per cent rise in the S&P BSE Sensex. A combined around 33,000 shares changed hands on the counter on the NSE and BSE within the first minute of trade.