Rising competition putting pressure on stocks of Avenue Supermarts

Shares of Avenue Supermarts, the operator of DMart retail chain of supermarkets and hypermarkets, have seen a correction of about 30 per cent from highs of Rs 5,400 levels in September. Analysts are calling for earnings downgrades given moderate July-September quarter (Q2FY25) results and rising competition from Quick Commerce (QCom) and stiff competition from Amazon and Flipkart which are also now in QCom.

 

While the earlier QCom players offered a price advantage to DMart, Flipkart Minutes and Amazon Tez are slightly below DMart on price, while pushing QCom convenience. Zepto’s discounts for orders above Rs 900 also brings it below DMart in terms of pricing. DMart may see earnings estimates being reduced further as high-throughput metro stores are hit by QCom.

 

The Q2 results and management commentary were disappointing. Management pointed to competition from online grocery formats affecting growth especially in high-revenue metro stores, while Q2 results missed street consensus.

 

Like-for-Like (LFL) growth in Q2FY25 was at 5.5 per cent vs 9.1 per cent in Q1FY25 (7.7 per cent in H1FY25) and 10 per cent in FY24. Aggressive scaling up by QCom players are hurting brick and mortar, implying further deterioration in operational metrics.

 

DMart is now more defensive. Store expansion has slowed and the share of general merchandise & apparel (GMA) is lower. DMart Ready is still to gain full traction and private brands are not yet relevant, as per the management. Growth algorithms of 20 per cent topline growth have halted, and given weak Q2 and limited triggers, underperformance may continue.

 

The stock has underperformed the market index by 6 per cent since its weak Q2 sales update. It currently trades at 79.2x the consensus 12-month forward P/E, which is below its 1-year average of 82.2x. However, this is still a very rich valuation given the competitive scenario. There appears to be threats from several quarters with the most obvious danger being the entry of new, deep-pocketed players into QCom.

 

Consensus still seems to be at around 20 per cent top-line growth for the next three years along with margin improvement. However, it is hard to see this conviction being sustained following the commentary. Both margin and revenue growth expectations are likely to be downgraded.

 

Monitorables include possible recovery trends in LFL growth, any management commentary that reveals coherent strategy around protecting DMart’s business model from e-Commerce and QCom. The pace of store expansion is also crucial. The scale-up of DMart Ready is also crucial.

 

The management has to pursue an aggressive store expansion strategy and accelerate the operationalisation of DMart Ready, and Minimax, along with improvements in LFL trends. Investors want to see a pickup in top-line growth momentum and other growth drivers, especially annual store expansion. A change in trends around QCom and e-Commerce and increased management aggressiveness in scaling up DMart Ready would also be welcome. A meaningful improvement in GMA (higher margin) share would also be welcome. Further bearish triggers would be continued weakness in LFL and top-line growth trend, increasing competition from e-Commerce and QCom players, and slower store expansion.