DMART REPORTS SUBDUED OPERATIONAL PERFORMANCE WITH PROFITABILITY BELOW ESTIMATES

Avenue Supermarts (D-Mart) – Q3FY23 First Cut

(CMP: Rs 3865; MCap: Rs 250280 crore)

Q3FY23 Earnings Summary

As guided by the management in its pre-quarterly update, Avenue Supermarts reported revenue growth of 25.5% YoY to Rs 11569.1 crore (3-year CAGR: 19%). Company added four new D-Mart outlets (22 in 9MFY23) taking the total store count to 306 with total business area of 12.6 million sq. ft. Average square feet of the new stores added is around 50000. Revenue per sq. ft. did witness marginal improvement on a YoY basis (~3% YoY) to Rs 9182, however it continued to remain below pre-Covid levels (Q3FY20: Rs 9768). We believe the new larger stores added over the past two years have never got an opportunity to function in normal circumstances which is leading to lower throughput per store. D-Mart ready (online business) continues to perform well with revenue growth of 72% YoY to Rs 264 crore

The management highlighted FMCG and staples continued to outperform general merchandise and apparel segment. With the discretionary product mix being impacted, gross margins for the quarter came in below our estimate at 14.8% (I-direct estimate: 15.2%, Q3FY22: 15.4%, Q3FY20: 15.3%). On the back of festive purchases in the GM & apparel segment, Q3 generally tends to yield gross margins in excess of 15%. However multi-year low margins recorded in Q3FY23 reflects some grave challenges which could possibly be on account of heightened competitive intensity over the past two years and inflationary stress still pertaining in discretionary value segment. Opex too grew at a faster clip (~36%) than the revenue growth (25%). Subsequently EBITDA margins declined by 110 bps YoY to 8.3% (I-direct estimate: 8.8%. Absolute EBITDA grew by 11% YoY to Rs 965 crore (I-direct estimate: Rs 1012 crore, 3-year CAGR: 17%)

Higher depreciation expenses (owing to addition of new rented stores, up 31% YoY) and finance cost (lease liability, up 22% YoY) further impacted profitability. Ensuing PBT stood at Rs 811.8 crore (I-direct estimate: Rs 864 crore, up 8% YoY). Consequently, PAT for the quarter came in at Rs 589.6 crore (up 7% YoY, I-direct estimate: Rs 646.5 crore)

View: The revenue growth was broadly in line with our estimates and company has maintained its trajectory of 19-20% CAGR witnessed in the previous 4-5 quarters. Lower than expected gross margin owing to unfavourable product mix continues to subdue profitability. Enhancement of Gross margins would be the critical factor to watch out for. Over the last three years, the company has expanded its square feet addition by an impressive three-year CAGR of ~ 23% with average size of new stores being bigger (~60000+ vs. average 35000 sq ft). The new larger stores which were designed to provide more space for discretionary products 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. Though the business demand scenario has now normalised, but the company has not yet attained pre-Covid levels on the revenue per square feet front and an improvement in the same is paramount.

Impact: Negative