DMart Q1 Results Review - Weak Discretionary Demand Hurts Earnings: Motilal Oswal

Motilal Oswal Report

Avenue Supermarts Ltd.’s Q1 FY24 clocked 19% revenue compound annual growth rate over FY20-23 led by 20% footprint additions. Subdued same-store sales growth was mainly due to:

1. the additions of bigger stores over the last couple of years (20% rise in average store size), and

2. weak discretionary demand (share of discretionary items reduced to 23% in FY23 from 27% in FY20).

However, despite its weak SSSG, DMart has managed to protect its Ebitda margin at pre-Covid levels, through its strong cost-control measures unlike most other retailers.

We believe SSSG is set to recover in FY24, due to:

1. easing general inflation along with raw material cost reduction that may help in reviving discretionary demand; and

2. DMart’s strategy to open larger stores as the smaller ones are likely to report a growth plateau after almost three years (with their SSSG peaking out).

Those larger stores are now in the base and will start contributing to store productivity, with further room to grow their footfalls.

We have largely maintained our estimates, factoring in a revenue/profit after tax CAGR of 26%/27% over FY23-25 aided by 16%/9% growth in footprints/revenue productivity. We value the company at 43 times enterprise value/Ebitda on an FY25E basis to arrive at our target price of Rs 4,420. We reiterate our 'Buy' rating on the stock.

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