Avenue Supermarts Q1 Review: DMart Owner's Growth Prospects Strong But There's A Key Overhang, Say Analysts

Analysts expect store additions, growth in discretionary portfolio and improving demand as normalcy sets in to augur well for Avenue Supermarts Ltd. But see the stock’s recent run-up as a key overhang.

The Radhakishan Damani-founded operator of DMart supermarket chain saw its net profit jump more than half sequentially in the quarter ended June, beating a consensus of analyst estimates.

Avenue Supermarts Q1 FY23 Key Highlights (QoQ)

• Revenue jumped 14% to Rs 10,038.1 crore.

• Operating profit rose 36% to Rs 1,008.3 crore, against an estimated Rs 916 crore.

• Margin came in at 10% against 8.4% despite higher expenses.

• Total expenses rose 12% to Rs 9,191.8 crore.

The company also posted the highest quarterly revenue so far in the first quarter on a low base. The corresponding periods in FY22 and FY21 were disrupted because of the pandemic-led restrictions and hence not comparable. Revenue rose 70% over the pre-pandemic levels or Q1 of FY20.

Shares of the company ended nearly 1% higher on Monday. Trading volume is nearly 11 times the 30-day average. The relative strength index of the stock is at 71, suggesting it may be overbought.

The stock extended its winning streak for the sixth day in which it has gained 21%.

Of the 26 analysts tracking the company, 17 maintain 'buy', two suggest 'hold' and seven recommend 'sell'. The return potential of the stock is a negative 3.1%.

Here’s what analysts made of Avenue Supermarts’ Q1 earnings.

• Maintains ‘neutral’ rating with a target price of Rs 3,500 a share, implying a potential downside of 11%.

• Cognizant of the prominence of new-age grocery models, rich valuation, and weak revenue per sq. ft. in the last few quarters. Valuation is expensive too.

• Despite the Covid-led disruptions, DMart doubled its footprint (opened a commendable 110 stores) over the last three years. The weak discretionary category was hit by an inflationary environment and higher store size has impacted store productivity.

• Older stores are delivering value growth, led by volume growth in discretionary products. This is the best reflection of the strength of DMart’s business, competitive impact, and the local economy.

• Maintains ‘buy’ with a target price of Rs 4,700 apiece, implying a potential upside of 19%.

• Results were a comprehensive beat on the profitability front driven by sustained improvement in product mix.

• Avenue Supermarts has been a consistent compounder with the stock price increasing at 35% CAGR in the last five years. DMart 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.

• Anticipate store addition trajectory to accelerate and bake in 80 incremental store additions.

• Robust liquidity position and healthy operating cash flows to provide impetus to store addition pace.

• Maintains ‘overweight’ with a target price of Rs 4,332 apiece, implying a potential upside of 10%.

• The improving demand outlook as normalcy sets in (higher sales, better product mix) and a high inflationary environment augur well for grocery retailers like DMart.

• Seasonally, Q1 is a good quarter for the company, like Q3, as students return to school/college and there is the onset of the monsoons.

• General merchandise and apparel recovered well sequentially, but still face some overhang of Covid-led disruptions and inflation. The discretionary mix for the company improved sequentially, but is not yet back to pre-Covid levels.

• The growth in the discretionary portfolio and its mix changing back to pre-Covid levels would be key factors to track.

• Downgrade to 'sell' from 'reduce' at a fair value of Rs 3,530 (Rs 3,300 earlier), implying a potential downside of 10.4%.

• Stock run-up warrants downgrade.

• Higher inflation and some continued Covid-19 overhang has led to weaker demand, although this trend is different from that being witnessed by some other offline retailers (apparel retailers in particular).

• It is difficult to say whether the current pace of store expansion will sustain or if there is still an element of catch-up for lower store addition during Covid period.

• Maintains ‘buy’ with a target price of Rs 4,571 apiece, implying a potential upside of 16%.

• DMart is IDBI's high conviction buy idea in retail sector.

• Modern stores (41% of total) couldn’t operate at full capacity since last two years due to Covid but have done extremely well during Q1.

• High inflation impacted recovery in discretionary business which is yet to reach pre-pandemic levels.

• In old DMart stores; positive volume growth in discretionary segment is encouraging. Net profit margin at 6.9% is highest ever.

• Maintains ‘buy’ with a target price of Rs 4,312 apiece, implying a potential upside of 9%.

• Operating leverages and efficiencies led to Ebitda margin expansion. Store additions were healthy at 10. It imbibes confidence of future recovery.

• DMart stock price has appreciated by 22% since last results, yet 33% down from peak.

• DMart’s business fundamental remains robust. Lower than expected store expansion, cannibalization, and shift in organized market to online with DMart’s slow transition are key risks to an otherwise strong business trajectory in a large addressable market.

• Maintains ‘hold’ with a target price of Rs 3,900 apiece (Rs 3,450 earlier), implying a potential upside of 9%.

• Value growth through positive volume growth in older stores is the best reflection of the strength of the business/local economy and competitive impact.

• DMart made good progress in this area during Q1 but will need another quarter of uninterrupted operations to understand this better.

• Management is watchful of potential volume stress in discretionary segments which may currently be masked by product price inflation.