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Motilal Oswal Report
Avenue Supermarts Ltd.'s consolidated profit after tax grew 8% YoY (25% miss), despite a 21% YoY increase in revenue, driven by the expansion in the company's footprint. This was due to weak demand in the margin accretive discretionary category, resulting in a 100 basis point drop in gross margin.
Additionally, store productivity remained flat with no increase in revenue/square feet, likely due to larger store sizes.
Over the last three years, DMart has been adding larger stores to their retail chain. With these larger stores, the company expects to see an increase in store productivity. The previously smaller stores are expected to experience a growth plateau after ~ three years. This, along with gradual recovery in discretionary demand, general inflation cool off, softening raw material pricing and healthy cost efficiency may see improvement in earnings growth.
While the robust store adds, coupled with strong cost efficiencies, could play a key role in growth, the near-term challenges within the discretionary segment and rich valuations could be the key monitorables for the company.
We have factored revenue/profit after tax compound annual growth rate of 26%/29% over FY23-25E, (realigning profit after tax downwards by 12%/3% for FY24/25E).
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