DMart Faces Volatility After Mixed Q2 Earnings

Avenue Supermarts, the parent company of the renowned retail chain DMart, recently released its Q2 earnings report, after the result on Monday stock dipped over 4% in in opening session. Avenue Supermarts reported consolidated revenue of ₹12,624 crore, marking a substantial increase from the previous year's ₹10,638 crores. Revenue grew by 6.4% from ₹11,865 crore in the June-ended quarter.

However, the company's net profit declined by 9% year-on-year (YoY) to ₹623 crore, down from ₹686 crore in the same quarter of the previous fiscal year. The operating profit during Q2 stood at ₹1,005 crore, compared to ₹892 crore in the corresponding period a year ago. The operating profit margin for the quarter was reported at 7.96%, down from 8.4% in Q2FY23.

During the first half of FY24, the company expanded its footprint by adding 12 stores, resulting in a total count of 336 stores. DMart operates across various regions, including Maharashtra, Gujarat, Daman, Andhra Pradesh, Karnataka, Telangana, Tamil Nadu, Madhya Pradesh, Rajasthan, NCR, Chhattisgarh, and Punjab.

Analyst Opinions

The release of the Q2 earnings report led to a diverse range of opinions from brokerage firms. Jefferies recommended a hold rating on the stock and increased the target price from the earlier ₹3,700 to ₹3,850. Also expressed concerns about the company's Q2 EBITDA, which fell below estimates due to lower gross margins and higher staff costs. Dmart's general merchandise and apparel segments reported muted growth during the Q2 period. Regarding store additions, Jefferies anticipates a ramp-up in the future.

In contrast, Morgan Stanley upgraded the stock to an overweight rating from its previous equal-weight call. And raised the target price to ₹4,471 from ₹3,786.

On the other hand, JP Morgan maintained an underweight rating on the stock with a target price of ₹3,200.

Citi and Goldman Sachs both retained a sell rating on the stock, with new target prices of ₹3,100 and ₹3,650, respectively.
Macquarie stood out with an outperform call and suggested a target price of ₹4,450, implying a potential upside of over 13%.

Company's Comments

CEO & Managing Director Neville Noronha acknowledged that Q2 FY24 witnessed revenue growth of 18.5%. However, he highlighted that gross margins continued to be lower compared to the same period in the previous year due to lesser contribution from the higher-margin general merchandise and apparel business. The company's GM&A sales contributed to 23.21% of sales in H1FY24, down from 24.75% in the previous year. DMart primarily focuses on offering everyday staples and essentials.

Future Outlook

DMart is actively working on strategies to address the challenges it faces. The company is actively working to improve its GM&A sales mix and is making efforts to adjust its merchandise assortment. DMart is also experimenting with new initiatives, such as in-store pharmacies and smaller store formats. While these initiatives are expected to bear fruit in the long term, analysts believe it may take some time. Investors should closely monitor DMart's progress in addressing these issues.

Final words

The Q2 earnings report from Avenue Supermarts provides a mixed performance, with revenue growth offset by challenges in the general merchandise and apparel business. Analyst opinions vary, and the stock's valuation remains a point of concern. The company is actively working on strategies to overcome these challenges and improve its performance in the future. Investors should carefully track DMart's progress in addressing these issues as the stock faces volatility in the market.