DMart dips 5% on weak Q4; here's how brokerages have interpreted the result

The EBITDA margin declined 110 basis points YoY to 7.3%, while the gross margin fell 90 bps YoY to 13.4% pulled down by lower revenue from the high-margin gross merchandise & apparel segment

Shares of retail chain Avenue Supermarts (DMart) dipped 5 per cent on BSE to an intra-day low of Rs 3,501 apiece on Monday as the company’s weaker product mix continued to weigh on the operating profit margins in the March quarter leading to a lower-than-expected performance. 

The company’s consolidated profit after tax rose 7.7 per cent YoY to Rs 460 crore in Q4FY23 on a 21 per cent jump in revenue led by store count additions. 

However, the yearly earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 5.4 per cent was the slowest pace of increase seen since its listing and was much below analyst estimates. 

The EBITDA margin declined 110 basis points YoY to 7.3 per cent, while the gross profit margin (GM) fell 90 bps YoY to 13.4 per cent pulled down by lower revenue from the high-margin gross merchandise and apparel segment (GM&A). This was on account of weaker discretionary spending and competition from peers, analysts said. 

Here’s what the top brokerages said on DMart’s Q4 performance: 

Jefferies | Hold | Target price: Rs 3,425

The brokerage has cut its FY24-25 earnings estimates by 9-10 per cent factoring in lower gross margins on account of the product mix pressure. GM&A revenue share at 23 per cent for FY23 was 40 bps lower YoY (vs 27 per cent pre-covid) as against the expectation of recovery. The structural story remains strong, but it believes, the stock has already priced this in. Valuations have come off the peak, but remain expensive. 

Prabhudas Lilladher | Buy for long-term gains | Target Price: Rs 4,447

The brokerage has trimmed its EPS estimates by 4/5 per cent for FY24/25. It believes the rising salience of ‘DMart Ready’ and the delay in general merchandise recovery will impact margins further in FY24. It has built-in a 30/20 bps decline in GM/EBIDTA in FY24 before it starts recovering in FY25. 

JM Financial | Buy | Target Price: Rs 4,255

DMart’s per-store revenue growth trend has been less buoyant than desired recently and challenges around weaker footfalls, and muted offtakes of discretionary items still persist. Same-store sales that is revenue from two years and older stores grew 11 per cent during the second half of FY23, which is reasonably strong. However, this implies that the newer stores are underperforming and dragging the system average down by quite a bit. We continue to like DMart and one should not get carried away by short-term weakness. 

Kotak Institutional Equities | Sell | Target Price: Rs 3,475

We believe DMart’s revenue trajectory has been impacted due to lower footfalls in stores and relatively lower sales of the GM&A category and marginal share gain of quick commerce and other e-commerce formats at the cost of the offline format. FMCG and the staples segment has continued to perform better than the GM&A segment. 

HDFC Securities | Sell | Target price: Rs 3,070

DMart’s unit economics is inching back to normalcy given its cost and capital allocation discipline. We maintain our EPS estimates (0.9/0.4 per cent in FY24/25) and our sell rating (a valuation call). Consumers are returning, which is a positive. Bill cuts/store stood at 0.85 mn/store (still below the peak of 1 mn/store in FY19) but better than our expectations of 0.78 mn/store).