Avenue Supermarts: Inflation deceleration may weigh on growth

30 Jun 2023 , 11:12 AM

Recommendation: Add

Target Price: Rs. 3,800

FMCG universe sales (a proxy for Dmart grocery sales) in FY24 is likely to witness a 414bps deceleration in growth YoY, which could result in similar slowdown for D-mart SSSG. Pickup in discretionary spending is unlikely to increase GM&A SSSG materially in our view, as consumers have possibly moved to other options for shopping. Trading at 73x FY25 EPS, D-mart is expensive and needs a price or time correction to become attractive for investors.

Decelerating inflation a risk to sales

D-mart’s sales per store growth is correlated to inflation, as 77% of sales is daily use staple products where price elasticity is high. Previously too, sales have been correlated to inflation. With inflation now decelerating, sales growth of the FMCG universe (proxy for D-mart grocery sales) is likely to slow down by 414bps in FY24 YoY. Consequently, there could be pressure on SSSG in FY24.

General merchandise and apparel revival?

There is a school of thought that with lower inflation, consumers will spend higher ondiscretionary items; resulting in higher sales for higher-margin GM&A products. However, GM&A sales for D-mart has underperformed apparel companies, i.e. consumers have moved to other avenues for GM&A purchase. Analysts at IIFL Capital Services feel there will not be a material change in GM&A salience from the current levels.

Downside risks to estimates

Keeping these issues in mind, analysts at IIFL Capital Services believe that there could be downside risks to theirs and consensus estimates. While the overall growth opportunity is exciting (high-teens CAGR possible over 20-year horizon), valuation at 73x FY25 EPS is demanding. Analysts at IIFL Capital Services advise investors to wait for either a price or a time correction in the stock to make it more attractive.