Avenue Supermarts slips 6%, hits over 6-month low post Q3 results

In Q3FY23, earnings before interest, taxes, depreciation, and amortization margins declined by 100 bps YoY to 8.6 per cent from 9.6 per cent in Q3FY22

A sub-optimal October-December quarter (Q3) performance during the ongoing financial year (FY23) hammered Avenue Supermarts' stock to over six-month low level on Monday.

The shares plunged 6 per cent to Rs 3,627 apiece in intra-day trade, hitting their lowest level since July 5, 2022. They, eventually, settled 4.75 cent lower at Rs 3,678.65 as against 0.28-per cent dip in the benchmark S&P BSE Sensex.

The sharp knock comes after the Q3FY23 result disappointed investors on revenue growth, margin, and store addition front. Consequently, brokerages have cut their earnings estimate for FY23/24/25 to factor-in the recent financial performance.

The owner and operator of DMart chain of stores reported standalone revenue growth of 24.7 per cent in Q3 at Rs 11,300 crore. Ebitda and net profit also increased lower-than-expected at 12.2 per cent and 9.4 per cent YoY to Rs 860 crore and Rs 640 crore, respectively. Ebitda is earnings before interest, taxes, depreciation, and amortization.

On a per-store basis, revenue grew 4.4 per cent YoY at Rs 35,900 per square feet as against Rs 38,700/square feet in Q3FY20. CAGR over a 3-year period versus pre-pandemic, therefore, is just 2 per cent.

"DMart’s unit economics remains sub-optimal vis-à-vis the pre-pandemic days. While we factor in recovery over FY22-24, this assumption stands at risk, given the heightened competitive intensity from deep-pocketed retailers. We maintain 'SELL'," said Jay Gandhi of HDFC Securities.

The brokerage has a target price of Rs 3,000 on the stock, implying 18 per cent downside from current levels.

That apart, Avenue Supermarts' gross margins for the quarter came below Street's estimate at 14.8 per cent. Ebitda margins declined by 100 bps YoY to 8.6 per cent from 9.6 per cent in Q3FY22.

Prabhudas Lilladher attributes this contraction to change in product mix. Cost of retail also moved up by 50bps YoY as operating leverage failed to benefit in a festival quarter. Further, high inflation, too, impacted discretionary spending in Q3, it said.

FMCG and staples outperformed general merchandise and apparel segments, while Discretionary non-FMCG sales did not perform as per expectations. DMart added 22 stores in the first nine months of FY23 (9MFY23) taking the total store count to 306.

"The pain-points in terms of lower throughput from newer stores in the network plus inflationary stress, and weak consumer sentiments impacting discretionary categories' offtakes continued to impact stores' throughput and mix and consequently, profitability," said JM Financial.

The brokerage further added that their earlier expectation that the business could use the excess margin (10.1 per cent in Q1 – highest-ever since listing) to enhance throughput did not play out, and margin has also tapered off since.

"Discretionary revenue needs to necessarily pick-up, and apart from macro, 'crowd' at the stores need to build up more to drive this," it said.

Raining downgrades

Centrum Institutional Equities has adjusted their EPS estimate for FY23/24/25 by +0.7/‐0.4/‐4 per cent, respectively, while Prabhudas Lilladher has cut EPS estimates for those years at 4.2/4.3/4 per cent.

"Our Q4FY23 estimates now factor in 28 per cent sales growth, 8 per cent Ebitda and 31 per cent PAT growth. Given just 22 store openings in 9MFY23, we expect an addition of 18 stores in Q4. We estimate 27.8 per cent YoY PAT CAGR over FY23-25. We believe DMart has a huge runway to grow with over 1,500 store potential in a consolidated market and scale up in DMart Ready. Any meaningful correction can be used as a good entry point," Prabhudas Lilladher said.

Motilal Oswal Financial Services further added that the prominence of new-age grocery models, their rich valuations, and weak management commentary on the non-food category, as well as lower revenue per sq ft in the last few quarters dent sentiment. It has a 'neutral' rating on DMart with a target price of Rs 4,050.

In the past one month, the stock has declined 7.85 per cent, as compared to 2 per cent fall in the S&P BSE Sensex. Moreover, in the past three months, it has slipped 14.5 per cent, as against the 3.7 per cent rally recorded by the benchmark index. 

 

Technical View

Bias: Negative

Target: Rs 3,400

Support: Rs 3,670

Resistance: Rs 3,900

 

Shares of Avenue SuperMarts have been trading with a weak bias since the start of calendar year 2023. With today's sell-off, the stock is testing the lower-end of the Bollinger Bands, placed at Rs 3,725-odd level on the daily chart. 

 

The Bollinger Bands have also expanded on the lower side, suggesting that the bias may remain bearish in the near-term. As per the weekly chart, a sustained trade below Rs 3,670 can accentuate the fall in the stock price. The stock can slide all the way to Rs 3,400 levels.

 

However, the upside seems to be capped around Rs 3,900 levels for now.

 

(With inputs from Rex Cano)