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We attended analyst meet hosted by DMart which provided depth on current demand trends and company’s strategy to build on fast growing e-commerce/QCom segment. Management said, (1) with strategy reset (building capabilities), the GM&A category saw sequential improvement, (2) with 341 pick-up locations, DMart ready format is present in 23 cities, (3) despite opening large stores, ~43K Sq.ft area, sales reached to pre Covid levels at Rs32,941/per sq.ft. That said, with 9.9% SSSG in FY24, bills cut grew 17.5% YoY. DMart expect to deliver gross margins ~14-15% and any increase in margins would be passed to consumer keeping its promise of EDLP. Though business indicators remain healthy, the company aims to remain relevant to customers by delivering value through operational efficiencies, quality products and competitive prices. Management retained its store opening target of ~45 stores in FY25 and believes it has steadily progressed on its ecommerce model and have no plans to push into Q-Com segment. With balanced narrative we retain our earnings and maintain ADD with TP of Rs5.428 (implying 75x FY26E EPS). Revived strategy and building capability saw rebound in GM & A category

We note in the past the contribution from GM&A category has declined steadily from 28% to 23% over FY19-23. Despite lower contribution from GM&A, DMart’s gross margins declined just 20bp. Reasons for weak demand in apparel can be attributed to, (1) elevated food inflation impacted discretionary spends, (2) many retailers jumped into value-fashion priced >Rs1000 segment, (3) consumer behavior altered with frequent changes in fast fashion quotient, and (4) price ruled over quality of merchandise. Based on these trends, DMart built internal capabilities to revive the business which has started showing up in the revenue momentum. With rest, management remained confident on rebuilding GM & A growth.

Store expansion remain the single most focus area for the management

Over the pandemic impacted years FY20-23, DMART aggressively expanded its store base by 148. Though finding large land parcels at right locations remain a key challenge for expanding store base, opening 40 new stores every year pose challenging, though it’s key focus area for the management. Management said, with current demand pattern it can have 1200-1400 stores. Even region like MMR, where DMART has meaningful presence, can hold 100 stores.

Remain committed to build e-commerce business over Q-Commerce

Management remains committed to build on DMart ready e-commerce business now expanded to 23 cities with clear focus on increasing consumer basket value. DMart ready will continue to focus on home delivery in large towns, with a focus on faster growth and improved delivery time (85% deliveries in 24 hours). Though MMR continue to be largest contributor to the total sales, Pune and Bangalore have started to perform better

Our view

We reckon D’Mart growth story revolves around, (1) healthy SSSG, (2) store expansion, and (3) offering great value through EDLP driving store footfall. We note, its cluster based expansion strategy focuses on store size optimization and improvement sale/sq ft. Moreover the disruption created by Q-Com players restricted to metros not impacting DMart’s footfall as the consumer prefer value over convenience. Further we highlight DMart’s cost led approach remains key driver for value seeking consumers, yet Q-Com players’ focus on customers who seek time/convenience and not necessarily price sensitive. We retain ADD rating with TP Rs5,428 (implying 75x FY26E EPS). Risk: growth might impacted by availability and cost of real estate.

Valuations

We reckon D’Mart growth story revolves around, (1) healthy SSSG, (2) store expansion, and (3) offering great value through EDLP driving store footfall. We note, its cluster based expansion strategy focuses on store size optimization and improvement sale/sq ft. Moreover the disruption created by Q-Com players restricted to metros not impacting DMart’s footfall as the consumer prefer value over convenience. Further we highlight DMart’s cost led approach remains key driver for value seeking consumers, yet Q-Com players’ focus on customers who seek time/convenience and not necessarily price sensitive. We retain ADD rating with TP Rs5,428 (implying 75x FY26E EPS). Risk: growth might impacted by availability and cost of real estate.

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