DMart Q1 Result Review: Analysts Raise Target Price Despite Muted Growth

Analysts retained their long-term bullish calls on Avenue Supermarts Ltd. and raised the price targets even as the DMart chain operator's first-quarter earnings missed estimates.

Consolidated net profit of the billionaire Radhakishan Damani-led company increased 2% to Rs 658.8 crore year-on-year in the quarter ended June, according to an exchange filing.

Avenue Supermarts Ltd. Q1 highlights (YoY)

• Operating profit up 3% at Rs 1,035, against an estimated of Rs 1,172 crore.

• Revenue rose 18% to Rs 11,865 crore, compared to an estimate of Rs 11,923 crore.

• Margin narrowed to 8.7% against 10% on higher expenses. Analysts had pegged the metric at 9.8%.

The weakness in margin was driven by a lower gross margin of 14.6%. This was due to lower mix of general merchandise and apparel segments, which trended below the pre-Covid first-quarter average of 15.7%.

However, the management indicated that sales contribution from general merchandise has been recovering and is trending towards pre-pandemic levels. Analysts say that the recovery in discretionary could drive growth.

Impact from the company's strategy to open larger stores appears to be bottoming out, analysts said. Revenue per square foot and per store rose 4% and 5%, respectively, over the previous year. The same-store sales growth is expected to recover in fiscal 2024, driven by easing general inflation, along with raw material cost reduction, that may help in reviving discretionary demand, said analysts.

However, they pointed out that rising competitive intensity from specialist apparel retailers like Zudio and Max Fashion remains a big risk for DMart.

Shares of Avenue Supermarts were trading 1.35% lower compared to a flat Nifty at 10.02 a.m. on Monday.

Of the 25 analysts tracking the company, seven maintain a 'buy' rating, seven recommend a 'hold' and 11 suggest a 'sell,' according to Bloomberg data. The average of the 12-month price targets implies a potential upside of 1.7%.

Here's what brokerages have to say about Avenue Supermarts' Q1 FY24 results:

Jefferies

• Maintains 'hold' rating on the stock, with a revised target price of Rs 3,700 apiece from Rs 3,425, implying a potential downside of 4%.

• Even as pressures continue, there was a sequential improvement in gross margins by 115 basis points, as the general merchandise mix is now close to pre-Covid level, which is a key positive.

• Potential reasons driving weakness in apparel sales contribution could be inflationary stress impacting mass discretionary consumption, lower footfalls versus pre-Covid impacting impulse purchase, and share gains by e-commerce.

• DMart typically accelerates store additions in the second half. The brokerage continues to build in 40 store adds over the remaining quarters.

Nuvama Institutional Equities

• Maintains 'hold' rating on the stock with a price target of Rs 4,015 (earlier it was Rs 3,913), implying a potential upside of 4.6%.

• The management did make a statement that the mix is improving and trending towards pre-pandemic level, but this quarter’s performance is not an improvement over last. Hence, this remains a concern.

• The key question remains if the mix change or the general merchadise profile is transient or marks a structural shift.

• Store openings are lower-than-expected at 12. But DMart’s store openings have been bunched up even in the past. The brokerage is building in 50 stores for FY24.

• Competition from e-commerce companies remains a key risk.

Morgan Stanley

• Assigns 'equal weight' on the stock with a target price of Rs 3,786 apiece, implying a potential downside of 1%.

• Revenue per square feet of Rs 8,613 during Q1 was higher than Rs 8,311 reported in Q1 of last fiscal, but lower than Rs 9,476 pre-Covid. This could be partly explained by the greater store sizes now.

• While the topline was broadly known, Ebitda and PAT growth slowed even on a 4-year CAGR basis to 15% and 19% versus 20% and 24%, respectively, in Q4 FY23.

• Lower demand for better-margin general merchandise and apparel categories remains a key challenge.

Motilal Oswal

• Retains 'buy' with a revised target price of Rs 4,420 apiece, implying a potential upside of 15%.

• Despite a weak environment, DMart managed to maintain its ebitda margin at pre-Covid levels through its strong cost-control, unlike most other retailers, which have taken a 200-650 basis points margin hit.

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

• The same-store-sales growth is set to recover in FY24 and could drive growth, buoyed by a revival in discretionary demand.

Dolat Capital

• Maintains 'sell' with a target price of Rs 3225 from Rs 3200, implying a potential downside of 16%.

• DMart's high margin general merchandise and apparel categories continues to struggle, with increase in competition from vertical players.

• The brokerage foresees increased challenges for Dmart in short-term with respect to same-store-sales growth, store additions and mix improvement in the backdrop of weak consumer sentiments, rising competition and rich multiples/high expectations. However, the long-term growth and business fundamentals of Dmart remain strong.