DMart's margin recovery may take time amid rising costs, store expansion

Despite strong revenue growth and improving same-store sales, DMart faces margin pressure from rising costs, store expansion and competition, delaying profitability gains

The Q2FY27 Avenue Supermarts (DMart) performance was lower than expected. Revenue growth was 18.4 per cent year-on-year (Y-o-Y). But margin pressure was visible.

 

Gross margin declined 10 basis points (bps) Y-o-Y to 14.1 per cent, while earnings before interest, taxes, depreciation and amortisation (Ebitda) margin contracted 28 bps Y-o-Y to 7.3 per cent.

 

Adjusted net profit grew 7.6 per cent to ₹804 crore, with net profit margin down 42 bps to 4.2 per cent.

 

Reacting to this, the stock shed 4.5 per cent to ₹3,362 and was the top loser in BSE 100 on Monday.

 

Same-store sales growth (SSSG) for stores operational for two years or more improved to 9.5 per cent in Q2FY27 (6.8 per cent in Q2FY26). But lower-margin sales, operating cost pressures and store expansion have put a ceiling on profits.

 

Revenue per square feet declined 0.9 per cent to ₹8,975, while Ebitda per square feet fell 4.6 per cent to ₹656. Revenue per store declined 1.2 per cent to ₹37.1 crore, while Ebitda per store contracted 4.9 per cent to ₹2.7 crore. The expanding store network should gradually become more profitable.

 

During Q2FY27, food revenue grew 19.2 per cent, while non-foods and general merchandise & apparel (GM&A) revenue increased 16.8 per cent and 17.8 per cent, respectively. Food carries lower margins than other categories and it contributes 59 per cent to revenue. Employee costs increased 2 bps as a percentage of revenue. Other expenses rose 16 bps Y-o-Y.

 

DMart issued 111 million bills during the quarter, implying Y-o-Y growth of 14.4 per cent. The company added 15 stores (18 stores in H1FY27), taking the store count to 518. The company added 85 stores in FY26 compared with 50 in FY25. DMart has a target of 15 per cent annual store-count expansion. The management highlighted that legacy stores in markets like Mumbai and Bengaluru have reached maturity reducing upside from like-for-like growth. Intensifying competition from quick-commerce and e-commerce players will also be a factor.

 

DMart Ready is focused on improving the operating model and deepening presence in large markets.

 

The online business was operational in 19 cities a year ago and it has reduced to 11 cities as part of the change in operating model. The online segment is a new channel but profitability is going to be driven by unit economics and scale. In Q3FY27, results could be boosted by a lower base in Q3FY26 (13.2 per cent Y-o-Y), the goods and services tax (GST) transition impact, and movement in festival timings.

 

The capex in FY26 was ₹4,100 crore and capex through the next three financial years would be closer to ₹5,000 crore per year.

 

Capex is up 22 per cent Y-o-Y. Employee expenses increased 20 per cent. There is an 87 per cent rise in interest costs and a 29 per cent decline in other income, reflecting higher borrowings. 

 

Given the ongoing expansion, and the product mix with its high share of food, operating leverage should improve gradually.

 

This implies Ebitda margins would be around 7.5 per cent for FY27 and move up by around 20 bps in the next two financial years.

 

As stores mature, the revenue per sq feet should improve by mid-single digits.

 

Revenue, Ebitda and net profit annual growth should be high teens until FY29.

 

One positive is good working capital management, with the inventory cycle at 38-40 days and net working capital cycle at 28 days. But due to the expansion, there has been an inventory build-up and working capital has risen to ₹1,900 crore from ₹700 crore a year ago. Net debt (ex-lease) surged to ₹2,500 crore against ₹700 crore in March 2026.

 

 Consolidated revenue grew 18 per cent Y-o-Y to Rs 19,640 crore, and consolidated EBITDA rose 15 per cent Y-o-Y to Rs 1,390 crore as the Ebitda margin dipped 20 bps to 7.1 per cent. Operating losses at subsidiaries dropped to 2.3 per cent (3.6 per cent Y-o-Y and 6.1 per cent quarter-on-quarter or Q-o-Q). Consolidated net profit grew 8 per cent Y-o-Y to ₹740 crore and consolidated net profit margin contracted 35 bps to 3.8 per cent. The trend towards lower margins and higher costs allied with higher competitive intensity, is likely to disappoint investors.

 

Analysts have cut earnings estimates as it seems growth in revenue will take a while to translate into higher profitability. The writer is a New Delhi-based independent journalist