Improving signals for Avenue Supermarts with strong Ebitda, PBT growth

Consensus target price of analysts indicates limited upside; rebound in general merchandise and apparels crucial for margin gains

Avenue Supermarts, the operator of DMart retail chain, reported good results for the July-Septe­mber quarter (Q2FY24) with strong earnings before interest before interest, taxes and depre­ciation (Ebitda) and profit before tax (PBT) growth, but lower PAT due to higher tax incidence.
 

The operating margin improved, and like-to-like store sales growth was strong. Average bill value also increased though this may be a seasonal effect to some extent. Analysts are assuming this means the slowdown in retail may have bottomed out.
 

Although the apparel division may not be fast-growth, food and groceries could drive a rebound in demand. Earnings growth is expected to accelerate through FY25 and FY26.
 

There is a clear growth runway with a potential to add steadily to the number of stores.

 

Consolidated revenues grew 18.7 per cent year-on-year (Y-o-Y) to Rs 12,620 crore. Gross margins contracted 45bps Y-o-Y to 14.7 per cent due to lower contribution from general merchandise and apparel. Ebitda grew by 12.7 per cent Y-o-Y to Rs 1,000 crore ev­en as margins contracted by 42bps Y-o-Y to 8 per cent. PBT grew by 13.9 per cent to Rs 852 crore.
 

Adjusted profit after tax (PAT) declined 9.1 per cent Y-o-Y to touch Rs 620 crore, with higher tax rate of 26.8 per cent and a base effect due to Rs 140 crore tax write-back in the year-ago quarter.
 

Bills grew from 108 million to 147 million Y-o-Y, while like-to-like sales grew by 8.6 per cent and sales per square feet increased by 6 per cent to Rs 8,984.
 

The average sales per store increased by 6.5 per cent as against an average of 4.5 per cent increase in the past three quarters. Cash flow from operations remained steady at Rs 1,646 crore versus Rs 1,675 crore Y-o-Y.
 

Capital Work-in-Progress increased by Rs 390 crore versus March’23 (18 new store openings in H1FY24) indicating a significant pick up in store openings in H2FY24. In FY25 and FY26, the company could open 40 stores per year. In e-commerce, sales from DMart Ready grew by a CAGR (compounded annual growth rate) of 84 per cent to Rs 2,200 crore during FY20-23, 

but losses continued.
 

DMart Ready’s sales grew 6x during FY20-23 while e-commerce losses increased only by 2x indicating improvements in 

e-commerce operations. DMART Ready expanded e-commerce operations to cover 22 cities across India.
 

Discretionary spends in general merchandise and apparel remained under pressure in Q2FY24.
 

Although General merchandise is recovering to near the pre-Covid levels, the cut-back in apparel may be more structural. General merchandise and apparel share is 23.2 per cent of sales of Q2FY24, down 154bps Y-o-Y. This is the highest margin category and hence, the slowdown in contribution also hurts margins.
 

The long-term prospects look strong. Organised retail has only about 5 per cent penetration and DMart has therefore strong growth prospects. A recovery in General merchandise and apparel would be a key factor in growth acceleration and in delivering better margins.
 

The drop in PAT and the poor returns in general merchandise and apparel have led to a small sell-off in the stock, which closed 2 per cent lower on Monday at Rs 3,856. According to Bloomberg, 
 

eight out of 20 analysts polled since Saturday (post Q2 results) are bullish on the stock; seven have a reduce/sell rating, and rest are hold/neutral. Their average target price is Rs 3,982.