Avenue Supermarts slips 3% to hit 8-week low after margins squeeze in Q2

Shares of Avenue Supermarts, which owns and operates D-Mart stores, slipped 3 per cent to Rs 4,188.85 in Monday’s intra-day trade, after the company reported subdued operational performance in the September quarter (Q2FY23).

The stock price of one of the largest food & grocery retailers in India hit an eight-week low and traded at its lowest level since August 23, 2022. In the past one week, the stock declined 6 per cent, as compared to 0.29 per cent rise in the S&P BSE Sensex. In the past one year, it slipped 21 per cent, as against 5 per cent fall recorded by the benchmark index.

D-Mart is a national supermarket chain that offer customers a range of home and personal products under one roof. The company offers a wide range of products with a focus on foods, non-foods (FMCG), and general merchandise & apparel product categories.

While D-Mart’s revenue per store climbed 9 per cent year-on-year (YoY), revenue/sqft remained 10 per cent below pre-covid levels of Q2FY20, due to higher store size and inflationary pressure seen across non-food category.

As guided by the management in its prequarterly update, on a favourable base, Avenue Supermarts reported revenue growth of 36.6 per cent YoY to Rs 10,638 crore. Other expenses, meanwhile, grew significantly by 51 per cent YoY to Rs 528 crore. Subsequently, EBITDA margins declined 20 bps YoY to 8.4 per cent from 8.6 per cent, in a year ago quarter.

The management asserted that the FMCG and staples segment of the business performed better than general merchandise and apparel segments. Discretionary items in the non-FMCG segment, however, still has not recovered back to pre-covid levels. The inflationary stress, therefore, is more acute at lower price points in discretionary non-FMCG categories.

“With the discretionary product mix being impacted, gross margins for the quarter came in at Rs 15.1 per cent below our estimate at 15.6 per cent. 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,” the management said.

Analysts believe that the Q3FY23 will be a critical quarter to watch out, with the upcoming festive season.

“We expect the company’s RoIC to improve in the current financial year driven by dual triggers of enhanced margins and better store throughput,” ICICI Securities said.

Meanwhile, analysts at Motilal Oswal Financial Services (MOFSL) raised the company’s FY23E store additions to 45 from 40, on the back of continued strong store addition trajectory (18 store adds in 1HFY23).

“The recovery of revenue per store indicates that D-Mart has reached above the preCovid level; however, nearly 20 per cent higher average store size and weak demand in non-food category are impacting revenue productivity adversely on per-sqft basis,” MOFSL added.