Avenue Supermarts Ltd - Stock Valuation and Financial Performance

At par numbers . Revenue per square feet has seen a 5% increase in H1 FY24 rising to Rs. 16,729 from Rs. 15,964. 12 new store additions during H1 FY24.

Healthy revenue growth driven by store additions lead to good performance. Adverse impact from the larger-sized stores appears bottoming out with revenue/sqft and revenue/store rising 4% YoY and 5% YoY, respectively.

Muted Result on account of lower consumer spending in general merchandise and apparel persisted, impacting the margin mix.

Avenue Supermarts Ltd | Market Cap: Rs. 2,75,535 Cr

CMP 4255 | P/E 115x FY23

Results: Avenue Supermarts (DMart) reported year on year 22% growth in sales largely from store additions and profit before tax* grew 23% year on year. The SSSG (same store sales growth) was more or less flat.

*Profit before tax is a better measure for comparison in case of retail companies as new accounting standards (IFRS) mandates the companies to capitalize operating lease and report the same as interest and depreciation expense.

Click here for 10 year X-ray

Key highlights:-

• The company added 17 stores during the quarter and 29 in last three quarters taking the total store count to 263.
• Operating margins were higher from lower growth in employee and other expense, but gross margins were disappointing from inferior product mix. (Discretionary spends and high margin goods like apparels and merchandise haven’t grown at par with company growth)

Avenue Supermarts Ltd | Market Cap: Rs. 1,92,227 Cr

CMP 2,968 | P/E 100x FY22

Recommendation | SELL

Results: Avenue Supermarts (DMart) reported year on year 10% growth in sales and operating profit grew 15% year on year. The SSSG (same store sales growth) saw a decline of 3%.

Click here for 10 year X-ray

Key highlights:-

• The company added 1 store during the quarter and 9 in last three quarters taking the total store count to 221. Also it launched Dmart Ready (E-commerce arm) in select pin codes of Amhedabad, Bangalore & Hyderabad.
• Operating profit growth was thanks to cost cutting measures in other expenses which improved EBITDA margin to 9.3% versus 8.8% in same quarter previous year.
• December quarter Same Store sales growth was -4% year on year. The restricted store operations in certain cities post Diwali (due to night curfews and weekend closures) led to large revenue declines from those stores versus last year.

Outlook: As per the management, December month didn’t go well as the festival months of October & November.

Although overall sales and sales mix is trending close to pre-pandemic levels, there is a consumption pattern changes after the outbreak of COVID-19. 

Lesser trips and higher basket values continue. There is a general reduction in basket values compared to peak pandemic levels, but they still continue to be relatively higher than pre-COVID levels.

Apparel, Laundry, Footwear, Travel and such relevant out of home usage categories are taking more time to recover. The inconsistent supplies of products from the non-FMCG sector, rising prices of raw materials, and non-availability of certain product categories could have an impact on sales mix and margin in the near term.

MoneyWorks4me Opinion: Dmart’s growth rate is linked to number of stores it opens across the country and sales growth per store. As stores mature, same store sales growth will reduce and company’s growth will be more correlated to store growth. We find that with current cash flow generation, the growth rate beyond 25% CAGR is not practical, unless company keeps raising equity. Maximum Growth rate = ROE generation without new capital raise. Even if we assume 25% CAGR growth over next 10 years, upside from today’s price is less than Fixed Income returns. This provides no margin of safety. If you are already invested, you can consider selling partially, and it can be added back later after interim price correction. (We have updated valuation of Dmart using 10 year DCF model to reflect longevity in growth in current fair price)

We understand that you will have few favorite stocks in your portfolio which you want to hold tightly irrepsective of price. In such case, we recommend not more than 15-20% in such stocks and not more than 5% in each. This way you don't get affected by price volatility or poor returns as stocks very much ahead of fair value tend to disappoint if growth is not commensurate with the expectations built in price.