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Healthy topline growth, product mix to improve.

Avenue Supermarts Ltd. (DMart) owns & operates India’s most profitable supermarket chain, DMart. It provides products like food, non-food (FMCG), general merchandise & apparel through 341 stores (total 14.2mn sq.ft).

* We maintain our BUY rating with a revised target price of Rs. 4,300 owing to healthy revenue growth and store additions.

* Revenue grew by 17%YoY, aided by store additions, however, profitability was lower (gross margin declined by 10bpsYoY to 14.2%) due to inflationary stress on discretionary product demand.

* Operating profit grew by 15%YoY as EBITDA margin declined by 10bps YoY to 8.5% (8.1% QoQ).

* As per management, contribution from high margin segments has stabilized and the trend is encouraging. This along with moderating inflation and healthy store additions will improve earnings growth.

* We reduce our margin assumptions and expect Revenue/PAT to grow at a 22%/20% CAGR over FY23-25E. DMart currently trades at 75x 1Yr Fwd PE. We value DMart on a DCF basis, which implies 63x on FY26 EPS.

Healthy topline growth aided by strong store additions.

DMart reported healthy revenue growth of 17% YoY, aided by strong store additions in recent years. DMart opened 17 new stores in 9MFY24 and 90 stores in the last 2 years, which will aid future growth. Further, DMart is gradually improving its E-Com business channel, ‘DMart Ready’, currently available in 22 cities which now contributes ~2.5% total revenue. Recently, the company has set up a new subsidiary, Reflect Healthcare and Retail Private Limited, to launch pharmacy shop-in-shops and has opened one in the Mumbai metropolitan region. Pharmacy shop-in-shops are expected to scale up in the future, which, will also boost footfalls. We expect a standalone revenue CAGR of 22% over FY23-25E, supported by healthy store additions.

Margins to recover on expected improvement in product mix.

Gross margin declined to 14.2% from 14.3% YoY (14.0%QoQ) due to a deterioration in the product mix. Due to inflationary pressure, contribution from higher margin segments like general merchandise & apparel business (GM&A) was lower, which impacted margins. However, GM&A contribution has stabilised and trends are encouraging post Diwali as per the company. EBITDA margin declined by 10bps YoY to 8.5% (8.1% QoQ). The discretionary mix is expected to recover, aided by declining inflation, which will improve margins in the coming quarters. Gross margin is expected to be lower in FY24 compared to FY23 due to the deterioration in the product mix but expected to improve in FY25 aided by better discretionary demand supported by lower inflation.

Valuation & Outlook

DMart has strong growth potential given its healthy balance sheet with no debt and strong operational efficiency. Healthy store additions will aid future revenue growth, while moderating inflation will improve discretionary demand and margins. DMart is currently trading at 75x 1Yr Fwd PE. We arrive at a target price of Rs.4,300 by valuing on a DCF basis, which implies 63x on FY26 EPS, maintaining our BUY rating.

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