Neutral Avenue Supermarts Ltd for the Target Rs 3,925 by Motilal Oswal Financial Services Ltd
Growth recovers, but profitability and FCF weaken
* Avenue Supermarts’ (DMART) revenue growth accelerated to ~18% YoY in 2Q (vs. ~15% in 1Q) as LFL growth recovered to 9.5% (vs. 5.5% in 1QFY27). Store additions picked up to 15 in 2Q (vs. 3 in 1Q), taking the total to 518 (+20% YoY).
* However, profitability was weaker, with EBITDA/PAT missing estimates by 3%/ 7%, as EBITDA margin contracted ~30bp YoY due to weaker gross margin (- 10bp YoY because of lower GM&A) and higher cost of retailing (CoR) per sqft, which rose ~3% YoY owing to entry-level wage inflation.
* 1HFY27, revenue/EBITDA/PAT grew 17%/15%/10% YoY, led by ~20% YoY area additions, while EBITDA margin dipped ~10bp YoY to 7.8% due to higher CoR.
* Pre-Ind AS 116 EBITDA grew ~15% YoY to ~INR27.8b in 1HFY27, with the margin contracting ~10bp YoY to ~7.4%.
* In 1HFY27, the standalone FCF outflow stood at INR16.6b (vs. YoY outflow of INR4b), due to a working capital build-up (INR19b vs. INR7b YoY) and higher capex (up 23% YoY). Net debt (ex-lease) surged to INR25b (vs. INR7b in Mar’26).
* We cut our FY27-28 EBITDA/PAT estimates by 1-3%. We model a CAGR of 16- 17% across DMART’s consol. revenue/EBITDA/PAT over FY26-29E, driven by ~15% CAGR in area additions and mid-single-digit LFL growth.
* We assign a ~35x Dec’28E Pre-Ind AS EV/EBITDA multiple (implying ~57x Dec’28 P/E) to arrive at our TP of INR3,925 (vs. INR4,000). Reiterate Neutral
Slightly weaker margin print; LFL growth recovers to 9.5%
* Standalone 2Q revenue grew ~18% YoY to INR192b, driven by 20% YoY area additions and a recovery in LFL growth to 9.5% (vs. 5.5% in 1Q/6.8% YoY).
** The company added 15 stores/0.7m sqft area to reach to 518 stores and 21.4m sqft. This implies an average store size of 46.7k sqft. for stores added in 2Q, higher than the existing average store size of 41.3k sqft.
** Annualized revenue per store declined ~1% YoY to INR1.51b, while annualized revenue/sqft remained stable YoY at INR36.6k.
* DMART’s standalone gross profit came in at INR27.2b (up ~18% YoY, our est. INR27.5b) as gross margin (GM) contracted 10bp YoY to 14.1% (~20bp miss).
** The share of the higher margin General Merchandise & Apparel (GM&A) category moderated ~10bp YoY to 21.9%, while the share of the lower margin Foods category increased ~40bp YoY to 58.8%.
** The company’s standalone EBITDA at INR14b (vs. our est. INR14.4b), rose ~14% YoY, as margin contracted ~30bp YoY to 7.3% (~20bp miss) largely due to a weaker gross margin.
** Driven by strong store openings, employee costs spiked ~20% YoY. ? Other expenses grew ~22.5% YoY, likely reflecting the impact of higher minimum wages for contract labor.
* Standalone PAT at INR8b (7% miss), rose ~8% YoY, with PAT margin moderating ~40bp YoY to 4.2%. This was due to an 87% surge in interest costs and a 29% decline in other income, reflecting higher borrowings for store additions.
Losses at subsidiaries narrow YoY, likely due to calibration at DMART Ready
* Consolidated revenue grew 18% YoY to INR196.4b (vs. our est. INR197.5b).
* Consol. GP grew 17% YoY to INR29.3b(vs. our est. of INR29.9b) as gross margin contracted ~15bp YoY to 14.9% (~25bp miss).
* Consol. EBITDA rose ~15% YoY to INR13.9b (vs. est. of INR14.3b) as the EBITDA margin dipped ~20bp YoY to 7.1% (~15bp miss), led by weaker standalone margin.
* Operating losses at subsidiaries moderated to 2.3% (vs. 3.6% YoY, 6.1% QoQ).
* Consol. PAT grew 8% YoY to INR7.4b (7% miss). PAT margin contracted ~35bp YoY to 3.8%, as finance costs surged 83% YoY and other income slid 31% YoY.
Valuation and view
* While the QC dent remains concentrated in dense metro catchments for now, we believe overall discounting and customer acquisition intensity are unlikely to moderate in the near term and could weigh on DMART’s growth and margins over the medium term.
* We cut our FY27-28 EBITDA/PAT estimates by 1-3%. We model a CAGR of 16-17% across DMART’s consol. revenue/EBITDA/PAT over FY26-29E, driven by ~15% CAGR in area additions and mid-single-digit LFL growth.
* We assign a ~35x Dec’28E Pre-Ind AS EV/EBITDA multiple (implying ~57x Dec’28 P/E) to arrive at our TP of INR3,925 (vs. INR4,000).
* Acceleration in store additions and sustenance of mid-to-high single-digit LFL growth remain the most important growth levers for DMART. The stock, however, lacks near-term triggers to outperform; hence, we reiterate our Neutral rating
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
