Rating: Buy; Avenue Supermarts: Well placed for earnings revival



DMART has exhibited a remarkable CAGR of 23% and 24% in revenues and earnings respectively over the past five years. With a turnover of `430 billion, the company has only begun to tap into its potential. We believe that DMART has ample room for growth, considering that the modern retail sector in India is still in its early stages. Despite a recent slump in stock price due to weak same store sales growth (SSSG), we anticipate key catalysts that will drive future growth. In this report, we explore these catalysts and present our case for a Rating upgrade.

Despite the challenges posed by the Covid pandemic, DMART managed to achieve an impressive 20% CAGR in area expansion between FY20-23, resulting in a 19% growth in revenue. However, the company faced weak same SSSG due to two main factors: the addition of larger stores over the past few years, which impacted store productivity, and a decline in discretionary demand within the value category, leading to a reduced market share from 27% to 23% in FY20. Nevertheless, we foresee a recovery in SSSG for FY24, driven by the following factors: first, as general inflation eases and raw material costs decrease, there is a potential revival in discretionary demand; second, DMART has implemented a revised store strategy, shifting from smaller stores with a 30-35k sqft size to larger stores since FY19/20. With these developments in sight, DMART is poised for a rebound and growth trajectory, leveraging its resilient business model and strategic decisions.

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Despite the recent aggressiveness of online/quick commerce platforms, DMART remains one of the most competitive grocery retailers, along with JioMart (Reliance Fresh), with 6% lower pricing consistently over the last 12 months. DMart Ready has expanded its footprint to 22 cities with store metrics that are close to breakeven. It operates on the next-day delivery model, unlike other quick-service e-grocers, which have lower fill rates and delivery size, mostly catering to daily needs instead of monthly grocery orders.

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DMART’s well-oiled business model with a strong focus on low procurement costs, cost savings from supply chain efficiencies and rental savings through the ownership model has created a deep moat and a virtuous cycle of growth. We believe DMART’s SSSG and earnings revision cycle are closer to bottoming out. Tailwinds from robust store additions and consistent cost efficiency could play a key role in SSSG recovery.


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