DMart shares fall on shrinking margins and slow recovery

DMart shares fall on shrinking margins and slow recovery

Shares in Avenue Supermarts fell more than 3% in the first half today, after the retail chain reported a fall in margins in Q2 FY23. Weak market sentiment and recession fears dragged markets down, contributing to Avenue Supermarts trading in the red.

The fall in shares of Avenue Supermarts comes after the company reported a 160 basis point decline in its margins to 8.4% from 8.6% a year ago due to rising costs, a slower recovery and inflation affecting its more profitable non-FMCG segment.

The sequential decline was worse from 10% in the 1st quarter of this year.

Overall, Avenue Supermarts’ revenue grew โ‚น 10,638 crore by 36.6% YoY and 6% sequentially. It added 8 new stores during the quarter.

Another challenge the company faces is declining revenue per square foot. While this metric saw a slight improvement sequentially, to โ‚น8,580, it is still 6.8% lower than the pre-pandemic level of โ‚น9,210 per sq ft.

โ€œUnderlying profitability is disappointing. Larger account sizes + lower number of steps help FMCG profitability/productivity but are indicative of more targeted shopping with little scope for discovery-based purchases (courtesy inflationary pressures), which in turn erodes more profitable GM and apparel sales,โ€ said a report by HDFC Securities.

โ€œThe FMCG and staples segment performed better than the general merchandise and apparel segments. Optional items in the non-FMCG segment have still not returned to pre-pandemic levels during the recovery,โ€ said Neville Noronha, CEO and MD, Avenue Supermarts, explaining the demand situation in key segments.

Noronha also added that the impact of inflation is more acute in the discretionary non-FMCG segment โ€“ โ€‹โ€‹i.e. non-essential products in the non-FMCG category. Apart from small appliances, DMart sells a wide range of products such as toys, bed sheets, cosmetics and utensils.

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Along with this, a 37% year-on-year increase in costs to โ‚น 9,926 crore also shaved the company’s margins.

Here is Avenue Supermarts Q2 in numbers:

Details Q2 FY23 Q2 FY22 Change
Revenues โ‚น10,638 crore โ‚น7,789 crore 37%
The net profit โ‚น686 crore โ‚น418 crore 64%
Net margin 6.5% 5.4% 20.2%

Source: Company News

Avenue Supermarts share priceBSE / Business Insider India / Flourish

Here’s what brokers recommend

A slow recovery in steps and inflation is holding back Avenue Supermarts’ margins. A report by ICICI Direct Research says most of the company’s upside is already captured at current valuations. So the reassessment would be based on recovery and the company being able to control its operating expenses.

โ€œDMart continues to be India’s most profitable low-cost retailer with a strong play on India’s retail growth story and a key beneficiary of the shift from the unorganized to organized segment. However, we believe current valuations capture most of the positives,โ€ the ICICI Direct report added.

Brokerage Rating/recommendation Target price Change
Morgan Stanley Overweight โ‚น4,590 7%
JP Morgan Underweight โ‚น3,445 -20%
ICICI Direct Hold โ‚น4,900 14%
HDFC Securities Sell โ‚น2,950 -31%

Note: Change from closing price of โ‚น 4,303 on 14 October 2022


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