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Higher discretionary sales, store growth key for gains in Avenue Supermarts

Consolidated net profit rose 17.5% Y-o-Y in Q1FY25 helped by general merchandise and apparel sales

Shares of Avenue Supermarts (DMart) have gained about 5 per cent over the past week on better-than-expected June quarter (Q1FY25) performance, hopes of a recovery in discretionary demand, and margin gains going ahead.
Ram Prasad Sahu
4 min read Last Updated : Jul 18 2024 | 12:56 AM IST
Shares of Avenue Supermarts (DMart) have gained about 5 per cent over the past week on better-than-expected June quarter (Q1FY25) performance, hopes of a recovery in discretionary demand, and margin gains going ahead.

The key takeaway from the results was the robust gross margin performance. Riding on improving mix, DMart posted a 34 basis points year-on-year (Y-o-Y) improvement in gross margins to 14.9 per cent. The company indicated that higher contributions from the more profitable general merchandise and apparel category led to the gross margin expansion.

Though there was an improvement, the gross margins are still lower as compared to the pre-pandemic levels (15.6 per cent/16.1 per cent seen in Q1FY20) as well as Q1FY23 (15.8 per cent), indicative of enough headroom to expand the share of discretionary categories, point out analysts led by Mehul Desai of JM Financial Research.

While the brokerage is positive on the company and has a “buy” rating, the key monitorables, according to it, are the pace of store expansion and the contribution of the discretionary category to sales. 

Even though gross margins were better than Street expectations, the same was not reflected at the operating level. While the operating profit grew by 17.8 per cent over the year-ago quarter, margins were flat at 8.9 per cent, weighed down by higher costs. 
Kotak Institutional Equities Research points out that the higher-than-expected gross margins were offset by higher employee costs (up 29 per cent Y-o-Y), as well as higher other operating costs (up 26 per cent Y-o-Y). Both standalone and consolidated results indicate this trend, indicating higher operating costs in offline operations, it adds. The brokerage has marginally cut its earnings per share estimates after the results while retaining its “sell” call. “We retain a cautious stance on the stock in view of expensive valuations. Higher-than-expected revenue growth or margin expansion are key risks to our call,” say analysts led by Garima Mishra of the brokerage.



Prabhudas Lilladher Research says that DMart's first quarter results meet expectations, indicating stabilisation in operational metrics. Sales per store grew by 4.7 per cent Y-o-Y, while sales per square foot increased by 4.4 per cent Y-o-Y, despite the opening of larger stores. The cost of retail rose marginally by 45 basis points Y-o-Y, driven by increased operating expenses aimed at enhancing service and sales capabilities for future growth. This led to a miss of 17 basis points on the operating profit margin front compared to analyst estimates.  

During the quarter, DMart expanded its footprint by adding 6 new stores, each larger by 50 per cent Y-o-Y and 20 per cent quarter-over-quarter (Q-o-Q).  Looking ahead to the financial year 2025, analysts noted, that DMart plans to open approximately 45 new stores, continuing its focus on Tier-II and Tier-III cities, potentially accelerating store openings further.

Analysts also highlighted that DMart's long-term growth prospects remain strong, with the potential to operate over 1,500 stores in the duopoly market. However, they cautioned about the slower expansion pace of DMart Ready compared to quick commerce players, which could pose challenges in the long term.

Prabhudas Lilladher Research has a price target of Rs 5,104 based on discounted cash flow (DCF) analysis. They noted that a re-rating of the stock appears unlikely given the current high valuations of 81 times FY26 earnings per share. Consequently, it has revised the stock recommendation from “buy” to “accumulate”.

DMart’s consolidated net profit rose 17.5 per cent Y-o-Y to Rs 773.7 crore in Q1FY25, helped by improvement in sales from general merchandise and apparel. The company had posted a net profit of Rs 658.7 crore in the same quarter a year ago. The supermarket chain operator’s revenue from operations soared nearly 19 per cent Y-o-Y to Rs 14,069.1 crore in Q1FY25 against Rs 11,865.4 crore in the corresponding quarter in the last financial year.

Topics :DMartAvenue Supermartsstock market trading

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