General merchandise and apparel growth key for DMart's margin gains

The retailer's revenues in Q2 were lower than estimates

The stock of Avenue Supermarts (DMart), was up 1.2 per cent in trade after its quarter two for the 2022-23 financial year (Q2FY23) update indicated a 36 per cent year-on-year (YoY) increase in revenues. The country’s largest listed retailer by market capitalisation posted revenues of Rs 10,384 crore. This was up 74 per cent as compared to pre-Covid-19 period (Q2FY20). Over a three-year period, growth has compounded annually, at 20 per cent.

Motilal Oswal Research, however, indicated that the standalone revenue growth was 6.4 per cent below its estimates. While overall revenue growth remained strong, calculated like-to-like growth in Q2FY23 was up 2 per cent YoY when adjusted for footprint addition. As compared to pre-Covid-19 levels of Q2FY20, this was 10 per cent lower. A soft performance in the value segment is hurting the non-staple category which accounts for 25-30 per cent of the revenue pie, says the brokerage.   

Its revenue per square feet, which was up 2 per cent YoY at Rs 33,727 is also trending below the pre-Covid-19 level. While the metric was down 12 per cent Q1FY23 as compared to Q1FY20, it is estimated to be 10 per cent lower in the September quarter as compared to levels three years ago. The average store size has increased by 21 per cent as compared to pre-Covid-19 levels and may take longer to hit stable revenue run rates.  

While the pre-quarter update is short of estimates, Prabhudas Lilladher Research recently upgraded the earnings per share estimate of the company by 3-4 per cent each for FY23 and FY24. Amnish Aggarwal and Anushka Chhajed of the brokerage believe that Avenue Supermarts has a huge growth runway ahead, given low probability of heightened competition in modern trade, 1500+ store potential in existing clusters and gradual scale up of online stores, DMart Ready.

The company added eight stores in the quarter taking the overall tally to 302 stores. This is 36 per cent higher than levels at the start of FY21. DMart is on track to meet its 40 additions to its store count for the current year.

In addition to physical stores, the pace of expansion of Dmart Ready is another trigger.  It is currently present in 12 cities with over 615 total pick-up points as compared to 350 plus in August last year with 60 per cent located in Mumbai and Pune, estimate analysts at Phillip Capital Research. The scale up of revenues (accounts for 5 per cent of revenues) and how quickly it breaks even (estimates point to FY25) will be key going ahead.

The Street will also track the margin trajectory of the retailer. On a low base, operating profit margins expanded by 590 basis points on a YoY basis to 10.3 per cent in Q1FY23. However, it is marginally lower when compared with pre-pandemic levels.

One segment which has weighed on margins is general merchandise and apparel. This, according to Centrum Research, is the most profitable category clocking margins of 20 per cent plus during the pre-pandemic period. Sales contribution from this category has declined, from 28 per cent in FY19 to 23 per cent in FY22. While the category has seen a pick-up in Q1FY23, it is yet to reach the pre-pandemic levels, given higher inflation levels, says the brokerage.

At the current price, the stock is trading at 88 times its FY24 estimates. Investors should await sustainable trends on overall sales and margins before considering the it.