Positive margin surprise improves performance of Avenue Supermarts

What's Buzzing

Avenue Supermarts (ASL) reported strong revenue growth of 93.7% YoY to Rs 10038.1 crore (three-year CAGR: 20%) in Q1FY23. Key positive for the quarter is the company recording 12-quarter high gross and EBITDA margins owing to improvement in product mix (general merchandise & apparel which yields better margins).

Context

The management highlighted that the recovery in GM & apparel (that yields higher margins) categories was encouraging and witnessed better traction than previous quarters (but still remains below pre-Covid levels). Subsequently, gross margins expanded materially by 320 bps YoY to 16.3%. Furthermore, owing to positive operating leverage, ASL recorded one of its highest EBITDA margin of 10.0% (up 570 bps YoY) in Q1FY23. Store addition during the quarter was impressive with addition of 10 new D-Mart outlets taking the total store count to 294 with total business area now crossing 12 million square feet (sq ft). The average size of the stores added during the quarter continues to be higher at ~ 60000 sq ft. Revenue per sq ft was at ~Rs 8300, still 10% below pre-Covid levels.

Our Perspective

Over the last three years, the company has expanded its area addition by an impressive three-year CAGR of 24% with average size of new stores being bigger (~55000+ sq ft vs. average 35000 sq ft). The new larger stores have never got an opportunity to function in normal circumstances over the last two years. Hence, the revenue throughput per sq ft has remained below pre-Covid levels (Q1FY20: Rs 9200, Q1FY22: Rs 3405, Q1FY23: Rs 8300). Also, the rationale behind opening larger stores was to stock higher discretionary categories such as GM & apparel, which yield better gross margins. However, Covid led disruptions materially impacted the performance of this category, which, in turn, impacted gross margins and RoIC for the stores. With the scenario now normalising and with scale kicking in, we expect the RoIC to improve in the current financial year, driven by dual triggers of enhanced margins and better store throughput. The company believes it would be able to provide better value to its customers by managing its cost better and providing value for money in an inflationary environment. We model revenue and earnings CAGR of 32% and 48%, respectively, in FY22-24E with healthy RoIC of 25%. D-Mart continues to remain India’s most profitable low cost retailer, a strong play on India’s retail growth story and a key beneficiary of the unorganised to organised segment shift.