Margin pressure, limited operations under lockdown to continue for D-Mart

Lower sales of discretionary products to weigh on profitability

After outperforming its peers in the March quarter (Q4), Avenue Supermarts had a muted June quarter due to restrictions imposed on account of Covid-19. The company, which runs the DMart chain of stores, had a sharp 34 per cent fall in revenues in the June quarter. 

The decline was largely due to the impact of the pandemic, which resulted in the closure of half of its stores in the early part of the quarter. Given social distancing norms, the footfall, too, was weak. However, as compared to fashion retailers, the impact on Avenue was lesser, as more than half of its revenue comes from groceries, which come under the essential goods list. 

The positive on the revenues front has come from DMart Ready, its online retail venture. 

Revenues from subsidiaries, including DMart Ready, were up 47 per cent year-on-year (YoY) to Rs 50 crore. While this could scale up in the future, at 1.2 per cent, it is currently a small part of the revenue pie. While most of its stores are open now and demand is at 80 per cent of pre-Covid levels, restricted hours of operations and the ongoing lockdown in certain areas will impact revenue growth in the future.

 

 

The sharp fall in revenues for a high-volume business had a disproportionately large impact on its operating profit, which shrunk 81 per cent YoY from just under Rs 600 crore in the year-ago quarter, to Rs 118 crore in the June quarter. Operating profit margins slid about 730 basis points (bps) to 2.9 per cent as lower gross margins, weak operating leverage, higher employee-related costs, and business activities to boost sales led to the fall in profitability. 

Employee and other expenses were up 22-28 per cent over the year-ago quarter. In addition to lower volumes, what has further pegged back margins is the lack of traction due to the lockdown from general merchandise (including apparel segment), which fetches higher margins. Lower discounting helped stem the decline of margins a bit in the quarter. Going ahead, analysts expect margins to be under pressure. Edelweiss Research says the absence of high margin and discretionary product sales is likely to impact near-term margins. 

While most brokerages are positive about Avenue Supermarts given its value retail focus and low cost operations, valuation at 132x its FY21 earnings estimate is on the higher side. Given the near-term pressure, the stock shed about 4 per cent in trade on Monday.