Q1FY24 Review: Avenue Supermarts: Too expensive to allow room for errors

17 Jul 2023 , 12:00 PM

D-Mart reported a weak quarter with profit growth of 2.3% missing IIFL Capital Services estimates by 11% on account of gross margin miss driven by a miss in General merchandise & apparel (GM&A) sales. The three concern areas for D-Mart are lackluster performance of the GM&A segment, the possible impact of lower impact on SSSG and lower than expected store additions. Analysts of IIFL Capital Services cut their EPS estimates 6-7% on the back of these results and downgrade the stock to REDUCE with a price target of Rs.3500 per share (65x June2025 EPS). Acceleration in store openings and improved performance of GM&A segment are key risks to analysts of IIFL Capital Services rating.

A weak quarter: 

D-Mart reported 18% sales growth (as per pre quarterly release) but Ebitda margin at 8.9% was 103bps below analysts of IIFL Capital Services estimate and Ebitda growth at 2.8% was 10.4% below analysts of IIFL Capital Services estimate. Lower gross margin (-125bps YoY) due to lower GM&A contribution led to the miss, resulting in Ebitda margin contraction of 133bps YoY. The company opened 3 new stores during the quarter and the 18% sales growth was contributed 13% by new store openings and 5% by higher sales per store.

Concern areas: 

D-Mart suffers from three main issues (1) the contribution from the high gross margin segment GM&A has fallen post Covid (23% in FY23 vs ~28% pre Covid) and is probably falling even more rather than recovering. (2) Fall in inflation could result in slower SSSG (FY24 sales growth for FMCG universe is ~400 bps lower than FY23 sales growth). (3) D-Mart is unable to ramp up store additions to the extent required; at the current pace, they will miss analysts of IIFL Capital Services estimates. 40 stores were added in FY23 and they have built in 55/60 stores in FY24/25.

Downgrade to REDUCE: 

On the back of these results analysts of IIFL Capital Services cut their sales estimates by ~2% and EPS by ~6-7% to account for the current results. The stock is expensive at 75x FY25 EPS for a sub 20% ROIC, sub 20% sales/profit growth and sub 25% FCF to net profit company. They see derating risk to the stock in addition to estimate downgrades. They downgrade the stock from ADD to REDUCE with a price target of Rs.3500 (65x June 2025 EPS). Key risks to analysts of IIFL Capital Services estimates are an increase in store openings and an improved performance in the GMA segment.w