+

Cookies on the Business Insider India website

Business Insider India has updated its Privacy and Cookie policy. We use cookies to ensure that we give you the better experience on our website. If you continue without changing your settings, we\'ll assume that you are happy to receive all cookies on the Business Insider India website. However, you can change your cookie setting at any time by clicking on our Cookie Policy at any time. You can also see our Privacy Policy.

Close
HomeQuizzoneWhatsappShare Flash Reads
 

Competitive intensity a big risk for DMart say analysts after company misses Street’s Q3 forecast

Jan 17, 2023, 13:49 IST
Business Insider India
Radhakishan Damani, founder of DMart operator Avenue SupermartsBCCL
  • Post the Q3 earnings of DMart operator Avenue Supermarts, analysts have flagged concerns due to increasing competition from deep-pocketed players.
  • Avenue Supermarts’ shares have declined over 9% in 2023 so far and are down 19.8% from their 52-week high of ₹4,609.
  • For now, analysts recommend investors adopt a “wait and watch” approach, while maintaining that they are confident about the company’s business moat and see a huge runway for growth.
Advertisement
Increasing competition from deep-pocketed players has emerged as a major concern for DMart operator Avenue Supermarts, after the company reported lower-than-expected quarterly profit, despite an uninterrupted festival season.

“Multiyear low margins recorded in Q3 FY23 reflect some grave challenges, which could possibly be on account of heightened competitive intensity over the past two years and inflationary stress still pertaining in the discretionary value segment,” said a report by ICICI Direct.

On Saturday (January 14), Avenue Supermarts reported a 6.6% year-on-year increase in consolidated net profit to ₹590 crore in Q3, while analysts had estimated it to rise to ₹672 crore.

Even the gross margins remained under pressure and came below analyst estimates – at 14.3% the company’s gross margins were 60 basis points lower year-on-year and below analyst expectations of 15%.

On Monday, the first day of trade after it reported its results, the company’s shares tumbled over 4%. Avenue Supermarts’ shares have declined over 9% so far in 2023 and are down 19.8% from their 52-week high of ₹4,609.

Advertisement

Since 2020, however, Avenue Supermarts’ stock is up 92%.

Avenue Supermarts' share price since the beginning of 2020Business Insider India / Flourish

Explaining the decline, Neville Noronha, CEO and managing director, Avenue Supermarts, said, “FMCG and staples segment continued to outperform the general merchandise and apparel segments. Gross margin percentage decline over the corresponding quarter of last year is a reflection of this mix change. Discretionary non-FMCG sales did not do as well as expected in this quarter.”

The company also reported lower sales density than pre-pandemic levels at ₹35,900 per square feet, compared to ₹38,700 per square feet in Q3 FY20. It also added only four stores in Q3, below the expectations of analysts at HDFC Securities, and taking its total store count to 306.

Increasing competition a worry



One of the deep-pocketed competitors of DMart is Reliance Retail, which had a network of 16,617 operational stores as of Q2 FY23.
Advertisement

According to analysts at HDFC Securities, DMart’s weak performance is due to multiple factors like increasing competition and elevated inflation.

“Channel checks suggest DMart’s weaker unit economics (than usual) is not just a function of high inflation keeping discretionary purchases in check but also a consequence of a fair challenge to DMart’s value proposition by deep-pocketed peers within its top districts,” said a report by HDFC Securities.

DMart also has a relatively weak presence in the online space – its e-commerce operations are currently live in only 22 cities, according to the company’s Q3 report. In contrast, Reliance’s JioMart service has a presence in 260 cities.

To add more value to its brick-and-mortar network, Avenue Supermarts announced that it is in the process of beginning a pilot pharmacy shop-in-shop in one of its retail stores.

‘Wait and watch’ for now, say analysts


Advertisement

Despite the company’s underwhelming performance in Q3 and the resulting cuts in earnings estimates, analysts recommend investors “wait and watch” for now.

“We recommend a wait-and-watch approach as we look for demand recovery triggers,” said a report by Axis Securities. The brokerage expects Avenue Supermarts to gain from a cooling inflation, but cut its net profit estimates by 17% for FY23, and by 7% for FY24.

“We believe the company’s overall quality of sales and margin profile is likely to recover in FY24 as the company passes on the RM (raw material) benefits through price reduction and increase grammage as well as due to the RBI’s intervention to curtail overall inflation, which will lead to the overall improvement in throughput,” the Axis Securities report said, cutting the price target by 8.75% to ₹4,000 but maintaining its “hold’ rating on the stock.

On Tuesday, the stock was trading 0.3% up at ₹3,691.

Analysts at Prabhudas Lilladher maintained a ‘buy’ rating on the stock despite cutting earnings per share (EPS) estimates by 4.2% for FY23 and by 4.3% for FY24.
Advertisement

“We believe DMart has a huge runway to grow with 1,500+ store potential (current stores 306) in a consolidated market and scale up in DMart Ready,” the brokerage said in its report.

Persistent demand concerns and the lack of any trigger for an upside in the Avenue Supermarts’ stock has resulted in brokerages trimming target prices for the stock. Analysts at Prabhudas Lilladher say a “meaningful correction” from here will be a good entry point to invest in the company.

SEE ALSO:

More unicorns focused on profitability now than just burning cash as funding winter sets in

Hiring by IT cos down 96% in Q3 compared to preceding 7 quarters even as attrition cools

Wipro sees FY23 revenue growth at 11.5-12%, Q3 profit growth beats analyst expectations
You are subscribed to notifications!
Looks like you've blocked notifications!
Next Article