DMart’s management painted a scary picture of the next few quarters ⁠— the shares of Radhakishan Damani’s company fell 5%

• While the fourth-quarter earnings looked strong, the forecast is for a sharp fall in profitability.
• Analysts have cut earnings estimates after the management said that the sales in April were down 45%.
• The margin may shrink further as the both the demand and supply of non-essentials take a hit while costs rise due to rising safety needs.

Radhakishan Damani became India's second richest man as his company Avenue Supermarts, which operates the DMart chain of department stores, became the 11th most valuable company in India and the top retail stock in the country.

But the COVID-19 crisis may take a lot of that sheen away, at least the management believes so, which is why the stock price fell a sharp 5% on Tuesday (May 26).

In the fourth quarter of the last financial year, DMart reported a 26% growth in revenue to ₹6255.93 crore and a 41.6% jump in profit to ₹271.28 crore, both compared to the same time last year.

However, the impact of the coronavirus pandemic accounted for less than a half a month⁠— the revenue growth in March was still 11% ⁠— but that was enough to drag the profit below the ₹381 crore in the preceding three months.

Since the beginning of the new financial year, the revenue was down by 45% in April and things could get worse. “Significantly large EBITDA declines are to be expected due to lower sales, lower gross margins, higher cost of operations on account of hardship allowance to front line staff during lockdown and higher personal hygiene/store sanitation costs,” said the company.

EBITDA stands for earnings before interest, tax, depreciation, and amortisation and it is a metric to measure the strength of a company’s core business.

DMart’s biggest pull for the customers are its discounts, especially for daily essentials. Where the company makes money is in the discretionary products like apparel and they aren’t allowed to be sold yet, in most parts of the country where the company operates.

With lockdown 4.0, the company has started selling non-essentials in about one in every three of its stores. However, even from a customer’s point of view, the demand for non-essentials is currently only “need based”.

Therefore, analysts from Prabhudas Lilladher have cut the FY21 and FY22 earnings per share estimate for DMart by 16.8% and 8.1% respectively.

What’s worse for the company, the costs are rising due to rising sanitisation and safety requirements. While it added 18 new stores in the last quarter, new store openings hereon will be affected due as construction activities have come to a halt.

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