DMart Q1 Results Review - Throughput Recovery Visible But Normalisation Still Some Time Away: Systematix

Systematix Research Report

Avenue Supermarts Ltd. reported ~18% YoY revenue growth in Q1 FY24, with Ebitda and profit after tax 4% below our estimates, given a slower than expected improvement in both throughput and sales mix. Newer stores continue to impact overall throughput with a continued fall in four-year revenue compound annual growth rate to 19% (fifth consecutive quarter of decline).

Ebitda margins were down 133 basis points YoY to 8.9% led by a 125 basis points gross margin contraction to 14.6% as weaker general merchandise and apparel sales continue to impact margins; however, GMA sales are recovering with contribution trending towards pre-pandemic levels.

This positive trend is also a factor in the QoQ improvement in gross and Ebitda margins.

Other expenses rose 20 bps which was partially offset by 10 bps savings in employee costs. Profit after tax came at Rs 6.95 billion, up 2.3% yoy. While the revenue per square feet was up 5.7% YoY to Rs 34,263, it remains 6% below the levels seen in Q1 FY20.

Ebitda per sqft was also weak as expected with a fall of 8% YoY to Rs 3,066. Negative operating leverage, large size of newer stores and weak footfalls has all been impacting the revenue throughput and consequently margins.

New store opening was also muted, with DMart opening three new stores during Q1 FY24 (40 stores in FY23), taking its total store count to 327, covering an area of 13.5 million sqft.

We build in a FY23-25E revenue/Ebitda/profit after tax CAGR of 22%/27%/25% respectively led by addition of 45 and 49 stores in FY24 and FY25 with a 5% and 6% increase in revenue per sqft coupled with a 60 bps margin expansion over the period.

Despite the weak earnings delivery in the recent past and expectations of a delayed recovery, we maintain our 'Buy' rating as the stock has already witnessed a long time correction, a full recovery especially in the GMA category looks to be coming closer as inflation is subsiding and the structural opportunity in both the offline and online space remain strong.

Despite a miss on our estimates, we expect the company to make up in H2 and therefore, maintain our price target of Rs 4,266 based on 75 times FY25E earnings, implying 47 times enterprise value/Ebitda.

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