IGI Logo

DMart’s Jun-Q report was not too different from those seen in recent quarters. Growth in sales per-store, though a tad better vs the last few quarters, is still not good enough given the business’ true potential, in our view. Discretionary sales remained an issue and continued to impact both throughput (and, therefore, operating leverage) and also gross margin. Management commentaries, interestingly, point to a silver-lining in this regard. As per the company, “general merchandise contribution is recovering and trending towards prepandemic levels”; apparels category still seems to need some work. A recovery in this part of the portfolio would help gross margin and also bring scale-efficiencies back into the business. We believe it’s more a question of when and not if. We continue to like DMart - businesses with such long growth runways are rare and we recommend investors to not get too carried away by short-term weakness(es).

* Per-store sales growth trend a tad better than earlier but not good enough given the potential: DMart’s 1QFY24 revenue grew 18.1% to INR115.8bn (standalone). EBITDA and net profit, however, grew at a much slower pace by 2.8% and 2.3% to INR10.4bn and INR7bn respectively - 5-6% lower than our forecasts. Store-count increased 11.2% yoy to 327 with only 3 new stores added during Jun-Q – likely some lead-lag involved here, in our view. Average sales per store grew 4.9% - tad better than that seen in the recent few quarters (normalised) but still not at par with what we believe the network is capable of delivering, given the strong runway that exists in the sector and DMart’s very compelling customer-proposition. Weaker consumer sentiments amongst the lower-income cohort is likely continuing to have its impact on Discretionary consumption plus our calculations also suggest that the newer stores (c.30% of the network commenced operations in the last two years) are likely taking longer to achieve optimum level of efficiencies. Subsidiaries’ (mainly DMart Ready) revenue grew 21.6% yoy (+9.3% qoq) with losses flat yoy and c.19% lower qoq.

* Gross margin remained impacted by adverse mix, leading to a much-weaker earningsdelivery than we expected: DMart’s 1QFY24 EBITDA performance was way lower than what we expected, primarily due to weaker-than-expected gross margin. A weaker-mix led to gross margin declining around 120bps yoy and by a similar quantum vs prepandemic levels when mix used to be more in-line with the medium-term trend. Management cited impact of lower sales contribution of apparels and general merchandise but also stated that a part of the impact is now abating, i.e. general merchandise contribution is recovering and trending towards pre-pandemic levels. The impact of lower gross margin flowed through entirely to EBITDA, which grew just 2.8% yoy – the compression in EBITDA margin (-133bps) was slightly steeper vs GPM as SG&A grew faster (+22.5%) than revenue (+18.1%) – on a per-store basis, SG&A grew 6.4% vs c.5% growth in revenue

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361

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