DMart Q3 Results Review - Seeing Early Signs Of Recovery In GM&A; Maintain 'Hold' Axis Securities

Axis Securities Report

Avenue Supermarts Ltd.’s consolidated revenue in Q3 FY24 grew by 17% YoY (19% on a four-year compound annual growth rate basis versus +20% in the last several quarters) to Rs 13,572 crore.

The growth in the non-fmcg segemnt during festive season was below management estimates. The management attributed that general merchandise and apparel has stablised and trends are encouraging post Diwali; however, we remain cautious and continue to look for sustained sign of recovery.

The company’s gross margins stood at 14.9%, flat YoY, while Ebitda grew 16% YoY. Ebitda margins stood at 8.3% (flat YoY) which was below our estimates. It reported profit after tax of Rs 690 crore, which was up 17% YoY.

Store addition: The company added five stores in Q3 FY24 (17 stores in nine months FY24), taking its store count to 341 stores, up 11% YoY. Its total retail area at the quarter-end stood at 14.2 million square feet, representing an addition of 0.3 mn sqft in Q3 FY24.

Outlook: We believe DMart is likely to struggle in improving its overall store matrix in the near term as –

1. Delayed recovery in general merchandise sales has been impacting the margins for the last several quarters,

2. larger and newer stores continue to struggle to improve their store matrix as its stores have a higher gestation period, impacting the company’s overall profitability,

3. Increasing competition from organised players (Reliance, Star Bazzar, Zudio) and online players (Zepto, Blinkit) with their increasing penetration in smaller towns.

We recommend a wait-and-watch approach as we look for improvement in the store matrix and demand recovery triggers.

Valuation and recommendation:

We have decreased our FY24/FY25E profit after tax estimates to factor near-term growth challenges. However, we have rolled over our estimates to Dec-25 (versus FY25 earlier).

Due to the limited upside potential, we maintain our 'Hold' rating on the stock with the revised target price to Rs 4,150/share. The target price implies an upside of 8% from the current market price.

Key risks to our estimates and target price

The demand environment continues to remain uncertain and it will impact the overall future performance of the company if the demand falters further.

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