Margin concerns in the near term for Avenue Supermarts

June quarter revenue was lower than expectations

The stock of Avenue Supermarts, which runs the Dmart chain of stores, has been on an uptrend on expectations that it would be a key beneficiary when lockdowns are lifted across states.

Since the lows of the end of April, the stock has gained over 23 per cent as the Street expects some traction for its online store, Dmart Ready, and continued market share gain in the retail space. What would have boosted sentiment further is the expectation that it would be included in the Nifty50 basket with the index to be reconstituted shortly.

The near-term trigger, however, would be its performance in the June quarter. The company, in a sales update, reported standalone revenues of ~5,031 crore, which was lower than expectations. While revenues are down 31 per cent sequentially, they are up by a similar quantum when compared to the year-ago quarter, which had a lower base. If the Covid-hit quarter is excluded due to the base, sales are down nearly 13 per cent when compared with Q1FY20.

Though 80 per cent of its operations were impacted in May, there was an improvement in the situation in May. Given that Maharashtra accounts for a bulk of its stores, the overall recovery could take longer as compared to other retailers.

Edelweiss Research believes that Dmart stores could see a quick rampup once they are fully operational. Says Abneesh Roy of Edelweiss Research, “Based on trends last year, once stores opened partially in June, they reached 80 per cent by July 2020 and were at 90 per cent by September 2020.”

In addition to revenue growth, the Street will keep an eye out for the product mix as it will impact the way margins will move in the quarter. For Q1, Motilal Oswal Financial Services estimates that the non-discretionary (food, non-food FMCG) segment would have hit 95 per cent of pre-covid level, while discretionary revenues may have recovered to 60 per cent of sales. The grocery/food part of sales accounts for 77 per cent of total sales.

Improved product mix had helped the company expand its operating profit margins by 170 basis points in the March quarter to 8.4 per cent. However, profitability could deteriorate as lower sale of higher margin general merchandise due to the lockdowns has seen its proportion slip in the quarter.

What could help the company improve its performance is growth in its online delivery platform, Dmart Ready. The company is expanding its presence (currently in seven cities) and adding more products on Dmart Ready. Goldman Sachs expects the sales contribution from this segment to rise to 20 per cent in FY29 as against 3 per cent in FY21. It expect Dmart Ready to be pre-tax positive by FY25.

Faster store rollouts could be a trigger once normalcy returns. The company has added 24 stores since the start of FY21, with the current count at 238. Given the target of 39 stores (four stores added in Q1) for FY22, the company is expected to add 35 stores in the next nine months.

The Street is positive about Avenue Supermarts, given the low share of organised retail in the overall market, its low price advantage, and balance sheet strength to expand and gain market share. However, investors should await consistent trends on revenue growth and margin expansion before considering the stock.