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Lower margin and higher CoR result in earnings miss

*Avenue Supermarts (DMART) posted weak results in 3QFY25 as standalone EBITDA grew 10% YoY (4% miss) due to weaker gross margin and higher cost of retailing (CoR).

*Management indicated that increased intensity in discounting in the FMCG category continued to impact the high turnover per sqft stores in metros. However, the impact was relatively lower versus 2QFY25.

*DMART’s like-for-like (LFL) growth for over two-year-old stores rose to 8.3% in 3Q (vs. ~5.5% in 2Q), albeit below the ~10% LFL growth rate in FY24.

*The company’s growth moderated in the non-food FMCG (~13% YoY) and GM&A (~16% YoY) segments, with GM&A’s contribution declining ~30bp YoY. We believe higher competitive intensity in FMCG and lower GM&A contribution could have led to moderation in gross margin (down ~20bp YoY).

*DMART added 10 stores in 3QFY25 (22 in 9M). Acceleration in store additions remains the biggest growth driver for DMART, and we expect the pace of store additions to pick up in 4Q (build in 40 store additions in FY25).

*Mr. Neville Noronha will step down as the MD and CEO of DMART, following the conclusion of his current term in Jan’26. Mr. Anshul Asawa has been appointed as the CEO designate. Mr. Asawa would join DMART after a 30-year stint at Unilever, where he currently serves as the Country Head in Thailand and General Manager of the Home Care BU in Greater Asia.

*We reduce our FY25-27E EBITDA by 4% each due to higher CoR and rising competitive intensity from Quick Commerce (QC), while we cut our FY25-27E EPS by ~4-7%. Reiterate BUY with a revised TP of INR4,450 (earlier INR4,750).

Weak standalone performance due to lower GM and higher CoR

*DMART’s revenue was up 17.5% YoY to INR156b (in line), driven by ~13% YoY area additions and 8.3% LFL growth.

*DMART added 10 stores and a 300k sqft area to reach 387 stores and 16.1m sqft area. This implies the addition of an average store size of 30k sqft in 3QFY25 (which is relatively lower than the average store size of 42k sqft).

*DMART’s store count rose ~13% YoY, while annualized revenue/store grew ~4% YoY to INR1.6b, and annualized revenue/sqft up ~3.5% YoY to INR39k.

*Gross profit came in at INR21.9b (up ~16% YoY, 2% below) as gross margin moderated 10bp QoQ/YoY to 14.1% (30bp lower than our estimate), possibly on higher discounting in FMCG and lower salience of GM&A in DMART’s category mix (-30bp YoY to 22.2%).

*EBITDA at INR12.3b (~4% miss) was up +10% YoY, as the margin moderated 60bp YoY (flat QoQ) to 7.9% (40bp miss) due to a weaker GM and a 10% YoY increase in CoR per sqft

*PAT at INR7.8b (7% miss) posted a modest increase of ~7% YoY, with PAT margin moderating 60bp YoY (~10bp QoQ) to 5%. ? DMART’s 9M standalone revenue/EBITDA/PAT grew 17%/ 13%/10% YoY

Weak standalone and higher loss in the subsidiary lead to 5%/10% miss on consol. EBITDA/PAT

*Consolidated revenue grew 17.7% YoY to INR160b (in line) supported by DMART subsidiaries (including e-commerce) growth of ~25% YoY.

*Consol. GP grew 16% YoY to INR23.5b (2.5% miss) as the margin contracted ~15bp YoY to 14.7% (~40bp miss).

*Consol. EBITDA was up 9% YoY to INR12.2b (5% miss) as the margin dipped 60bp YoY to 7.6% due to weaker standalone performance and higher operating loss in subsidiaries (-4.4% margin vs. -3% QoQ).

*Consol. PAT inched up 5% YoY to INR7.2b (10% miss). PAT margin contracted 55bp YoY to 4.5%. ? DMART’s 9MFY25 consol. revenue/EBITDA/PAT grew ~17%/~12%/~9% YoY. Our 4QFY25 estimates imply 15%/8%/3% revenue/EBITDA/PAT growth.

A slight moderation in GM&A growth; FMCG growth remains weak

*GM&A: The growth in the General Merchandise and Apparel (GM&A) category moderated slightly to ~16% YoY in 3Q (from ~18% YoY in 1H), with its share in revenue mix declining ~30bp YoY to 22.2% in 3QFY25 (significantly lower than 23.5% in 1HFY25). A lower share of GM&A has likely impacted gross margin.

*Food: DMART’s largest category, food, reported robust ~20% YoY growth in 3QFY25 (vs. ~17% YoY in 1HFY25) and accounted for ~58.1% of total revenue in 3Q (up 110bp YoY, vs. 56.4% in 1H).

*Non-food FMCG: Non-food FMCG remained the most impacted category as growth moderated to ~13% YoY in 3Q (vs. 14% YoY in 1H). Its share in the revenue mix declined ~80bp YoY to 19.7% in 3Q (vs. 20.2% in 1HFY25).

LFL growth recovers, though competitive intensity remains high

*LFL: Following a weak 2QFY25, DMART’s reported LFL growth for more than two-year-old stores recovered to ~8.3% in 3Q (from ~5.5% YoY in 2Q), albeit it remains below the ~10% LFL growth rate in FY24.

*Bill cuts and ABV: The total bill cuts increased ~16% YoY to 92m in 3QFY25 (vs ~13% YoY in 2QFY25). The average basket value (ABV) was up ~1% YoY at INR1,692 (INR1,653 in 2Q).

*DMART Ready: The DMART Ready business grew ~22% YoY in 9MFY25 (similar growth trajectory as 1H). DMART Ready has a presence in 25 cities, with operations commencing in Amritsar in 3QFY25.

*Management indicated an increase in the trend for home delivery vs. pick-up, and the company will continue to align its DMART Ready business accordingly, with “Home Delivery” as the only option offered in several towns.

Valuation and view

*Given the recent fundraising by the top 3 QC players, the competitive intensity has increased significantly.

*While we believe DMART’s value-focused model would co-exist with QC’s convenience model over the longer term, rising competition on pricing could weigh on DMART’s growth and margins in the near term.

*We reduce our FY25-27E EBITDA by 4% each due to higher CoR and rising competitive intensity from QC, while we cut our FY25-27E EPS by ~4-7%. We now model a 15-17% CAGR in DMART’s consolidated revenue/EBITDA/PAT over FY24-27E.

*We assign a 45x FY27 EV/EBITDA multiple (implies ~74x FY27 P/E) to arrive at our revised TP of INR4,450. We reiterate our BUY rating on DMART.
 

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