Growth in the discretionary segment key for Avenue Supermarts stock

Stable GMA share helped company report steady gross margins of 14.9% in Q3

Despite a lackluster show in the December quarter, the stock of Avenue Supermarts (Dmart) ended marginally higher in trade on Monday. While the bottom line performance of the largest listed retail player by market capitalisation was below the Street estimates, an inline revenue show and stability in the discretionary segment boosted sentiment.

Consolidated sales growth of the retailer was up 17.3 per cent Y-o-Y with a majority of the growth coming from retail area addition (12.6 per cent), while the rest was on account of same store sales growth. While the growth was broadly in line, it was lower than the four-year compounded average rate (19-20 per cent) and has moderated from the uptick reported in the June quarter. The company highlighted that the sales from non-FMCG segments in the festive season were lower than expected while within FMCG, agri-staples excluding edible oil were impacted by significantly high inflation.

The positive from the company’s perspective was that the share of the high-margin general merchandise and apparel (GMA) stabilised post-Diwali and sales in the period were encouraging. While the share of the GMA segment at 23.2 per cent in the first half of FY24 was lower as compared to 24.8 per cent in the year-ago period (1HF23), it was higher than the 23 per cent achieved in FY23. The Street, however, will keenly track the pace of improvement in the trajectory of this segment towards the pre-Covid highs of 27-28 per cent in FY19 and FY20.

The stable GMA share also helped the company report steady gross margins of 14.9 per cent. While the metric was 9 basis points lower than the year-ago period, it was 23 basis points higher sequentially on account of the stability of the GMA share. 

What has been disappointing is the slower addition of new outlets. The company added 5 stores in the quarter and 17 in the nine months of FY24. Kotak Institutional Equities says that DMart has added only 17 stores in 9MFY24 and none in the 14 days of January. The brokerage has reduced its FY24 store addition target to 35 (from 45), still assuming that Dmart can add 18 stores in the remainder of Q4FY24. This is lower than the 40-50 stores added in FY23 and FY24. 

In addition to the weak store expansion, Citi Research highlighted average revenue per square feet at Rs 9,890 was 10 per cent below Q3FY20 (pre-Covid), while gross margins at 14.2 per cent were 80 basis points below Q3FY20. The brokerage remains cautious about Avenue Supermarts over the near to medium-term earnings trajectory and expensive valuations (72 times FY25 earnings and 59 times FY26 earnings consensus estimates) and believes there is a downside risk to consensus earnings estimates.

Garima Mishra and Shubhangi Nigam of Kotak Institutional Research have a sell rating on the stock. They point out that the revenue growth of sub-20 in 9MFY24 is disappointing. The brokerage is monitoring the recovery of the GMA category while trimming FY2024-26 revenues by 2-3 per cent on lower store addition forecasts (35/55/70 new stores in FY2024/25/26). Lower margin assumption drives a 3-6 per cent earnings per share cut.