DMart stock hits 2-year high; up 5% on stable outlook

Strong store additions will aid future revenue growth, while moderating inflation will improve discretionary demand and margins, believe analysts.

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Shares of Avenue Supermarts, which owns and operates DMart store, hit an over two-year high at Rs 4,984.20, as they rallied 5 per cent on the BSE in Tuesday’s intra-day trade on stable outlook. The stock of one of the largest food & grocery retailers in India was trading at its highest level since November 2021. The stock had hit a record high of Rs 5,899.90 on October 18, 2021.

In the past six months, DMart has outperformed the market by surging 24 per cent, as compared to 8.4 per cent rise in the BSE Sensex.

DMart is a national supermarket chain that offers customers a range of home and personal products under one roof. The company offers a wide range of products with a focus on Foods, Non-Foods (FMCG) and General Merchandise & Apparel product categories.

The company offers its products under various categories, such as grocery and staples, dairy and frozen, fruits and vegetables, home and personal care, bed and bath, crockery, footwear, toys and games, kids’ apparel, apparel for men & women and daily essentials.

On June 4, CRISIL Ratings upgraded its rating on the long-term bank facilities of Avenue Supermarts to ‘CRISIL AAA/Stable’ from ‘CRISIL AA+/Positive’.

DMart’s operating performance registered strong growth in fiscal 2024 (FY24) with rise in volumes, scale up of stores opened over the past couple of years, and new store additions.

In FY24, operating Ebitda (earnings before interest, taxes, depreciation, and amortisation) stood at Rs 4,104 crore (8.1 per cent margin) against Rs 3,657 crore (8.5 per cent margin) previous fiscal. Margin moderated slightly year-on-year due to lower contribution of the high-margin accruing general merchandise and apparel business.

However, improving operating leverage will continue to support overall margin over the medium term. Consolidated profitability is expected to remain at similar levels, backed by faster breakeven of stores, superior per-store revenue compared with peers, stable proportion of non-F&G sales, high inventory turnover as well as maintenance of gross margin at around 15% despite increase in competitive intensity, CRISIL Rating said in its rationale.

The company has maintained healthy operating metrics while adding stores, and had prepaid debt through proceeds of its qualified institutional placement (QIP) in fiscal 2020. The entire QIP proceeds of Rs 4,098 crore were utilised by March 2024.

Strong cash generation of over Rs 3,000 crore per annum is expected to be sufficient for capex, resulting in low dependence on external borrowings. The company incurred capex of over Rs 2,500 crore in fiscal 2024 and increased retail space to over 15.1 million sq ft as on March 31, 2024, from 13.4 million sq ft previous fiscal, the rating agency said.

DMart has strong growth potential given its healthy balance sheet with no debt and strong operational efficiency. Strong store additions will aid future revenue growth, while moderating inflation will improve discretionary demand and margins, analyst at Geojit Financial Services said. The brokerage maintains a ‘buy’ rating on the stock with a target price of Rs 5,200 per share.

Analysts at Axis Securities believe DMart is likely to struggle in improving its overall store matrix in the near term as demand environment continues to remain weak in the discretionary category and is expected to recover only in H2FY25, larger and newer stores have higher gestation periods, thus impacting the overall profitability in near term, increasing competition from organized players (Reliance, Star Bazzar, Zudio) and online players (Zepto, Blinkit, Instamart) as they penetrate in smaller towns.