Emkay Global has initiated coverage on Avenue Supermarts, the operator of DMart, with a ‘Sell' rating and a target price of Rs 3,700, flagging emerging structural challenges in the retailer's business model. While DMart has long been seen as a dominant value retailer, the brokerage believes the company is now losing ground amid intensifying competition and shifting consumer preferences.
A key concern highlighted is the rapid rise of quick commerce (QC) platforms, which are increasingly matching DMart on pricing and assortment while outperforming on convenience. Emkay notes that QC players are targeting value-focused consumers—traditionally DMart's core base—after establishing strong delivery capabilities. This has begun to reflect in operating metrics. The brokerage flagged a concerning dip in bill cuts per square foot, indicating weakening throughput even as store expansion continues. Gross margins have also seen pressure, partly due to a weaker mix.
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DMart's aggressive expansion into new cities is driving a sharp rise in capital expenditure, which Emkay believes will weigh on free cash flows and increase reliance on debt. This comes at a time when returns are already moderating. Additionally, the company's gradual shift from owning stores to leasing them could trigger valuation de-rating. While leasing improves near-term scalability, it reduces long-term asset-backed advantages that have historically supported DMart's premium valuation.
The brokerage estimates that higher capex and a rising cost of equity are negatively impacting DMart's net present value (NPV). Even as store additions accelerate, the benefits may be offset by lower returns and higher funding costs. Emkay also expects negative free cash flow to persist, potentially leading to higher debt on the balance sheet and constraining profit growth. This marks a shift from DMart's historically strong, self-funded growth model.
Drawing parallels with Walmart's evolution, Emkay suggests that DMart may need to undertake more aggressive strategic changes to remain competitive. This could include deeper investments in supply chain, private labels, and digital integration.
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