DMart Q3 Results Review - Subdued Festive Demand Hits Fledgling Recovery Again: Systematix

Systematix Report

Avenue Supermarts Ltd. reported an in-line performance with ~17.2% YoY revenue growth (already reported), a 16 basis points margin decline to 8.5% (our expectation of 8.6%) leading to a 14.9% profit after tax growth in Q3 FY24.

The recovery in sales per store and square feet has fallen again after witnessing a pick-up in Q1 and Q2, given muted festive season sales and impact of agricultural staples inflation.

The trend of reducing gap between sales per sqft and sales per store continued indicating improved performance from larger sized stores. Revenue per store was up 5.2% and Ebitda per store was up 3.2% YoY. Revenue per sqft grew 4.7% YoY to Rs 37,563 while Ebitda per ft grew 2.7% YoY at Rs 3,178.

Ebitda margins were down marginally by 16 bps YoY to 8.5% led by a 9 bps gross margin contraction to 14.2% as contribution from general merchandise and apparel has stabilized and trends are encouraging post Diwali.

Festive sales in non-fmcg were below expectations indicating pressure on discretionary demand. Agri-staples (ex edible oil) are going through significantly high inflation, impacting demand.

Other expenses and employee costs were stable. Profit after tax came at Rs 7.36 billion, up 14.9% YoY.

DMart opened five new stores during Q3 FY24 (17 stores in nine months FY24 versus 22 in nine months FY23), taking its total store count to 341, covering an area of 14.19 million sqft. The store size of incremental stores was up both YoY and QoQ to 41.6k sqft.

While we expect the company to pick up the pace of store opening, we cut our store opening guidance from 45 to 40 stores now for FY24 which leads to a cut of 5%/7% in our FY25 revenue/Ebitda estimates.

We introduce our FY26 estimates and now build in a FY23-26E revenue/Ebitda/profit after tax compound annual growth rate of 21%/25%/27% respectively led by addition of 44 and 48 stores in FY25 and FY26 with a 5% and 6% increase in revenue per sq ft coupled with a gradual pick up in margins.

While the near-term headwinds of tepid GM&A sales and slow pace of store expansion remain, we maintain our 'Buy' rating as the stock has already witnessed a long time correction, store throughput numbers are improving steadily, a recovery in GMA sales looks imminent and the structural opportunity in both the offline and online space remain strong.

The impact of structurally lower apparel sales should be made up by other emerging categories.

Rolling over our valuation to FY26, we revise our  sum-of-the-parts valuation based target price to Rs 4,441 from Rs 4,400 based on 42 times FY26E enterprise value/Ebitda (30% discount to long period average of 60 times) for the offline business and three times FY26E enterprise value/sales for the online business, implying a FY26 price/earning multiple of 68 times.

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