Competitive and margin pressures likely to cap upsides for DMart

DMart's Q1FY26 pre-quarter update reveals slower-than-expected revenue growth and margin compression. Competitive pressures, particularly from quick commerce players, could weigh on future growth.

The D-Street reacted negatively to Avenue Supermarts’ (DMart) Q1FY26 pre-quarter update and the stock was down over 1 per cent at close. The standalone revenue of ₹15,930 crore was up 16.2 per cent year-on-year (Y-o-Y) but was below analysts’ estimates. On a quarter-on-quarter (Q-o-Q) basis, growth was 10.2 per cent.

 

Net store additions stood at nine in the quarter versus six in the first quarter of the financial year 2025 (Q1FY25) and 28 in Q4FY25.

 

The total store count stood at 424.

 

The same store growth rate was around 3-4 per cent while implied or estimated operating profit margin was just below 8 per cent versus 8.7 per cent a year ago. The net profit growth could be lower given higher depreciation and lower other income.

 

Annualised revenue per store grew 2 per cent Y-o-Y to ₹152 crore (3 per cent Y-o-Y growth in Q4FY25). The annualised revenue/square feet or sqft was calculated at ₹36,700, up 2 per cent Y-o-Y assuming 17.6 million sqft of store area. Faster store additions could be a key monitorable since it would create an upside. Analysts are assuming 60 net store additions in FY26 (50 in FY25).

 

The consolidated operating profit margins would compress due to a shift towards low margin food products and cost increases from faster pace of new store additions.

 

DMart will continue to face competitive pressures including from quick commerce players as well as from Reliance and V Mart among others. However, margins are likely to be under pressure across the space and VMart’s pre-quarter update indicates similar low growth patterns. 

 

The company is trying to build new levers of growth through initiatives like DMart Ready and Minimax.

 

Dmart Ready may counteract the online competitive pressures to an extent. A stronger recovery in middle class discretionary demand would also lead to faster growth since it would improve the like-for-like or same store sales growth or SSSG trends.

 

Dmart is focused on expanding its retail footprint in non-metro towns, since only 2 out of 9 stores have been added in major cities.

 

While Avenue Supermarts continues to look attractive in the context of being a leader in the under-penetrated and fast-growing organised retail sector, the company receives a high valuation multiple. Management has displayed good execution, focus, and a sensible approach to generate healthy returns based on prudent store expansion strategy.

 

But the rapid proliferation of online grocery plays is hitting Dmart’s high-turnover metro stores and this may slow down SSSG momentum, which is why there’s a shift to locations in smaller towns. But although growth is slowing and margins will be under pressure, DMart continues to lead and it could maintain low teens growth rates in revenues.

 

The stock generated a 30 per cent revenue growth over FY16-20 and that led to an extremely high price to earnings valuation of 90 times its one-year forward earnings per share. The growth rate is likely to halve now and there’s increasing pressure from quick commerce. While the company remains the market leader, the headwinds could mean sharp downgrades. Quite a few analysts have “sell” recommendations and some have target prices implying a 25 per cent correction.