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

17 Jul 2023 , 12:02 PM

D-Mart reported a weak quarter with profit growth of 2.3% missing IIFL Securities 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 Securities 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 Securities 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 Securities estimate and Ebitda growth at 2.8% was 10.4% below analysts of IIFL Securities 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 Securities 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 Securities 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 Securities estimates are an increase in store openings and an improved performance in the GMA segment.w