Slower pace of recovery in the higher-margin discretionary non-FMCG segment in a fully normal and festive quarter coupled with slower pace of network expansion leading to margin decline in October-December is keeping analysts cautious on Avenue Supermarts.
The company’s operating margin declined 100 basis points year-on-year and was flat quarter-on-quarter at 8.6% in October-December on account of inferior mix as general merchandise and apparel continued to remain subdued despite strong seasonality.
Inflationary stress acutely impacting mass discretionary consumption as well as low footfalls impacting impulse purchase were highlighted by the company’ s management as possible reasons for a weak mix even last quarter. These headwinds seemed to have continued in Q3 as well, analysts said.
“We believe, discretionary (in non-FMCG segment) has still not recovered to pre-Covid level due to stress in the lower price points,” ICICI Securities
DMart is incrementally adding larger area stores, while per-store revenues remained muted. According to the brokerage, sales per sq foot for the quarter were still lower by 9% compared to Q3FY20. This could be due to under-recovery in general merchandise and apparel, from which the company gets 25% of its revenue, and large size of stores of over 50,000 sq ft added by DMart over last 3-4 years, it said.
Moreover, store addition by Avenue Supermarts
The problem doesn’t seem to be driven just by a poor demand environment. The pace of network rollout also has decelerated, which, along with lacklustre revenue throughput, puts a question mark on the sustainable valuation multiples that DMart can command, other analysts said.
According to HSBC Global Research, the company’s valuation demands aggressive strategy. “We estimate that DMart’s share price implies a long-term earnings CAGR (20 years) of 14-15%, which will be difficult to achieve without an aggressive network rollout,” it said.
Led by weaker product mix, softer store addition leading to margin decline in December quarter, has led Jefferies to lower its FY23-25 earnings for the company by 6-8%.
ICICI Securities, too, has cut its earnings estimates for Avenue Supermarts for FY23/FY24 by 5%.
The company has a formidable business model and the growth opportunity is also large, but it needs an aggressive growth strategy to justify the valuation level it commands, analysts said.