IGI Logo

Margin pressure continues; foray into pharmacy a positive surprise

DMART’s 3Q revenue performance was decent driven by retail expansion and outperformance in Foods segment. However, underperformance in General Merchandise and Apparels & non-food segment contributed towards lower than expected operating profit (weak mix). Sales per sq. ft. continues to remain ~9% below pre-covid. However, we believe other than weak sales mix, large size stores also had an impact on lower sales per sq. ft calculation. Now, 50% retail area of DMART represents average store size of +50,000 sq. ft. (vs 30-35k sq. ft. earlier). In e-commerce business, entry into 4 new cities reflects intended aggression/usefulness of the business-model. Foray into new segment of pharmacy through shop-in-shop model (at one of the store) is reflection of business-optionality in platform companies like DMART.

We believe DMart has value and volume tailwinds: (1) inflation (higher absolute gross profit per unit, operating leverage) and (2) likely higher footfalls as more number of consumers prioritise value (read lower prices in the trading area). As per revised outlook we have cut our EPS estimates by ~5% during FY23-24E. Our revised TP stands at Rs3,900 (was Rs4,100). We maintain HOLD rating (expensive valuation).

* 3QFY23 – Decent revenue print driven by outperformance in Foods: Revenue / EBITDA / recurring PAT grew 25% / 12% / 9% YoY, respectively. FMCG and staples segment (Foods; 55% revenue share) continues to outperform general merchandise and apparel. We believe, discretionary (in non-FMCG) has still not recovered to preCovid level due to stress in the lower price points. Even as the new stores opened in the last two years continue to ramp-up well, sales per sq. ft. for the quarter were still lower by ~9% as compared to 3QFY20. We believe, this is due to (1) under-recovery in general merchandise and apparel (25% of revenue) (2) large size (50,000+ sqft) stores added by DMART over last 3-4 years (50% of total retail area added during FY20-Dec’23).

DMart Ready continued to scale-up well with 73% YoY revenue growth while expanding its presence in four new cities (total 22 cities) with focus on larger cities. More than 90% of the revenue of DMart Ready still comes from five cities – Mumbai, Pune, Bangalore, Hyderabad and Ahmedabad.

* Store addition on track: DMart added 4 stores in the quarter, taking its total store count to 306 (12.6mn sq. ft.). In the quarter it seems to have added stores of larger size – as per our math, the average size of new stores is ~50,000 sq. ft. versus overall average of ~41,000 sq. ft.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

SEBI Registration Number INZ000183631

Above views are of the author and not of the website kindly read disclaimer