Avenue Supermarts falls on Q4 margin decline, slow recovery in merchandise sales

The management said that the fall in margin has come on the back of slow recovery in gross merchandise and apparel sales, that are high margin businesses compared to staples

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Avenue Supermarts shares fell over 3 percent on May 15 after the D-Mart operator announced a 100-basis-point decline in the March quarter operating margins on May 13.

The company’s margin fell from 8.4 percent in the same period last year to 7.3 percent this year. The company’s EBITDA (earnings before interest, taxes, depreciation, and amortisation) growth was also relatively modest, increasing by 4.4 percent on-year to Rs 771.5 crore.

At 9:35am, the stock was quoting at Rs 3,550.05 on the NSE, lower by 3.4 percent. The stock is down over 12 percent in 2023 so far.

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The company’s net profit for the March quarter increased by 8 percent YoY to Rs 460.1 crore and revenue from operations jumped 20.6 percent YoY to Rs 10,594 crore. DMart opened 18 stores this quarter and 40 stores in FY23, compared to 50 during FY22, taking the total store count to 324.

The management said that the fall in margin has come on the back of a slow recovery in gross merchandise and apparel sales, that are high-margin businesses compared to staples.

For Nuvama Institutional Equities, this is a major concern. “Key question remains if the mix change/gross margin profile is transient or marks a structural shift,” Nuvama’s analysts said in a report.

The firm has changed the target valuation for Avenue Supermarts from EV/EBITDA to P/E to ‘better reflect the profitability history and its bearing on valuations’. Valuing it at 70x FY25 P/E, it has a Hold rating on the stock with target price of Rs 3,913.

For analysts at Motilal Oswal Financial Services, tailwinds from robust store additions and continued cost efficiencies could play a key role in earnings recovery.

However, the stock looks expensive, according to the domestic broking firm. An additional ~10 percent correction may improve valuation comfort, it believes. It has a Neutral rating on the stock with target of Rs 3,895.

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