Recovery timeline, subdued margins to keep DMart stock under pressure

Higher competition may lead to market share loss

The Avenue Supermarts stock was down one per cent after its June quarter results disappointed the street. India’s largest retailer by market capitalisation slipped on the gross margins front which hit its all time lows. The metric, at 12.36 per cent, was down 129 basis points YoY and more than 200 bps lower as compared to the preceding quarter. Most analysts had pegged the number closer to 14 per cent.

The margins were lower due to the restrictions on sale of non-essential goods which fetch higher margins than the staples segment. Analysts at Jefferies say the multi-year low gross margins were a surprise and was lower than the 13.7 per cent reported in the June quarter last year which too was impacted by an inferior mix.

The gross profit impact could have hit the operating profit margin (OPM) as well had it not been for cost control measures. While OPM came in 400 basis point lower sequentially, they were up 160 basis points up y-o-y benefiting from operating leverage and weaker base.  

Revenues, however, were up 31 per cent YoY. Despite restrictions, there was higher footfall in the June quarter this year as compared to last year which had a compulsory national lockdown. The higher footfalls, according to Goldman Sachs, indicates consumer preference for the company given its lower price offering. The company indicated that it needs 45 days of unhindered operations to hit the pre-covid sales momentum.

Brokerages have cut their estimates by up to 8 per cent for FY22 to reflect the lower gross margins. Given the lack of clarity on complete recovery, intense competition and market share loss, most brokerages have a sell rating on the company. Say analysts at Kotak Institutional Equities, “Successive waves of covid are driving up market shares of general trade and e-commerce at the expense of brick-and-mortar modern trade. This is evident in the fact that Dmart’s revenues have registered a negative two-year growth rate of 7 per cent in 1QFY22 compared to single digit growth for most large FMCG companies.”