Avenue Supermarts Q1 Review: Brokerages Maintain Stance; Shares Fall

Most brokerages retained their cautious stance on Avenue Supermarts Ltd., the operator of DMart stores, citing below-estimates quarterly earnings and expensive valuations.

Net profit of the supermarket and hypermarket chain fell 74% over the previous quarter to Rs 115.1 crore in the three months ended June, according to its exchange filing. That compares with the Rs 159.7-crore consensus estimate of analysts tracked by Bloomberg.

• Revenue declined 31% sequentially to Rs 5,031.8 crore, compared with the estimate of Rs 5,032.7 crore.

• Operating margin narrowed to 4.4% from 8.4% in the preceding quarter.

“We believe the margin impact to be one off as a consequence of the Covid-19 restrictions,” Goldman Sachs said in its post-earnings report.

Shares of Avenue Supermarts fell as much as 2% on Monday compared with a 0.44% rise in the benchmark Nifty 50.

Here’s what brokerages have to say about DMart's first-quarter performance:

Goldman Sachs

• Maintains ‘buy’ rating with a target price of Rs 3,690 apiece.

• “We believe the margin impact to be one-off as a consequence of the Covid-19 restrictions in place.”

• Gross margins were negatively impacted due to restrictions on sale of non-essential products and the impact was higher than our estimates.

• It believe that higher footfalls indicates continued consumer preference for Avenue Supermarts due to its lower price offering.

Jefferies

• Maintains its ‘underperform’ rating with a target price of Rs 2,300 per share.

• Revenue growth benefited from a low base, as lockdown last year was far more stringent.

• Store count was also higher by 22 over last year, which supported the revenue growth.

• Though the decline in overheads did partly offset the gross margin decline, Ebitda margins saw a 400 bps decline sequentially to 4.4% (+160 bps on a low year-on year base).

Motilal Oswal

• Maintains neutral ‘rating’ with a price target of Rs 3,220 apiece.

• “Our channel checks suggest that the non-discretionary category has seen a healthy recovery to nearly pre-Covid levels once the lockdowns was lifted.”

• The management had indicated that it will add 59 stores over FY20-22. It has added 20 stores in FY21. It may look to add 39 stores in FY22, implying 35 store additions over the next nine months, provided there are no further restrictions.

• Risk of a moderation in growth, owing to strong traction for online retailers in a post-Covid world; and the presence of deep pocket players like Amazon.com Inc. and Reliance Retail Ltd. restricts the near-term upside.

Kotak Institutional Equities

• Maintains its ‘sell’ rating with a revised target price of Rs 2,000 per share from Rs 1,950 per share earlier.

• Modern trade has lost share over the past year while e-commerce and general trade have gained.

• Overall store addition in FY2022 will probably be more than approximately 30 that the brokerage expects the company to add in a normal year.

• Margins under pressure due to restrictions on selling general merchandise.

ICICI Securities

• Maintains its ‘reduce’ rating with a target price of Rs 3,000 per share.

• Even as limited sale of general merchandise would have continued to impact margins, the contraction (on year-on-year basis) is sharp.

• Believes the benefit of rising staples and FMCG prices is yet to be seen in margins.

• Key upside risks are fast turnaround of e-commerce operations and lower-than-expected competitive intensity.