Buy Avenue Supermarts Ltd For Target Rs.4,600 by Motilal Oswal Financial Services Ltd
Strong beat on profitability; sustainability remains key
* Avenue Supermarts (DMART) delivered a strong beat on profitability in 3QFY26, driven primarily by gross margin (GM) expansion.
* GM expanded 50bp YoY to 14.6% (~60bp beat) in 3Q, likely driven by GST reduction benefits (lower discounting) and a favorable category mix (higher GM&A and FMCG share at the expense of the lower-margin Food category).
* Further, after several quarters of elevated cost of retailing (CoR), DMART reported a stable CoR per sqft in 3Q, driving 50bp EBITDA margin expansion to 8.4% (~80bp beat) and a 20% YoY standalone EBITDA growth (11% beat).
* While margin performance was encouraging, revenue growth moderated to ~13% YoY, largely driven by ~14% store area addition, as like-for-like (LFL) growth moderated to 5.6% (vs. 6.8% in 2Q and 8.3% YoY).
* DMART added 10 stores in 3QFY26 (~27 in 9MFY26 vs. 22 YoY). The acceleration in the pace of store additions remains the primary growth driver for DMART. We continue to build in 60 store additions in FY26.
* While DMART saw a margin recovery after several quarters, we believe increased pricing competition from QC could prevent margin sustainability and remains a key monitorable in the near term.
* We raise our FY26-28 EBITDA and PAT by ~3-5%, primarily driven by higher GM. We build in a CAGR of 16%/16%/12% in DMART’s consol. revenue/EBITDA/PAT over FY25-28E, driven by a 15% CAGR in store additions and ~6% LFL growth.
* We assign a ~43x FY28 EV/EBITDA multiple (implying ~79x FY28 P/E) to arrive at our revised TP of INR4,600. We reiterate our BUY on DMART.
20%/18% YoY EBITDA/PAT growth driven by a sharp margin expansion
* Standalone revenue grew ~13% YoY to INR176b (in-line), driven by ~14% area additions and 5.6% LFL growth (vs. 6.8% in 2Q and 8.3% YoY).
* The company added 10 stores/0.4m sqft area to reach 442 stores and 18.3m sqft. This implies addition of an average 40k sqft stores in 3QFY26 (which is slightly lower than average store size of 41.4k sqft).
* DMART’s store count rose ~14% YoY, while annualized revenue per store declined ~1% YoY to INR1.6b and annualized revenue/sq. ft was flat YoY at INR38.9k.
* Standalone gross profit came in at INR25.6b (up ~17% YoY, 4% above) as GM expanded ~50bp YoY to 14.6% (~60bp beat).
* The higher-margin General Merchandise and Apparel (GM&A) category share improved ~15bp YoY to 22.3%, while that of Non-food FMCG rose ~45bp YoY to 20.2%. Meanwhile, the Foods category share declined ~60bp YoY to 57.5%, likely due to the impact of the GST transition and deflation in staples.
* Standalone EBITDA stood at INR14.8b (11% beat), rising ~20% YoY, as margins expanded 47bp YoY to 8.4% (80bp beat), driven by higher GM, while CoR per sq. ft. remained stable YoY (vs. ~7% YoY increase or ~30bp higher in 2QFY26).
* Employee costs surged 32% YoY, while other expenses grew at a modest ~7% YoY. ? Depreciation increased 18% YoY, finance costs jumped 2.2x YoY, while other income declined ~17% YoY.
* As a result, standalone PAT at INR9.2b (12% beat) was up ~18% YoY, with PAT margin expanding 20bp YoY to 5.2%.
For 9MFY26, DMART’s standalone revenue/EBITDA/PAT grew 15%/13%/8%
Strong standalone results drive beat, consol EBITDA up 20% YoY
* Consolidated revenue grew 13.3% YoY to INR181b (in-line).
* Consol. GP grew 18% YoY to INR27.7b(5% above), as margins expanded 58bp YoY to 15.3% (~65bp beat)./*
* Consol. EBITDA rose 20% YoY to INR14.6b (11% beat), as margins expanded ~45bp YoY to 8.1%, largely driven by higher standalone gross margin and slightly lower operating losses in the subsidiary (~3.6% operating loss margin, vs. -4.4% YoY and our estimate of -4.1%).
* Consol PAT grew ~18% YoY to INR8.6b (12% beat). PAT margins expanded ~20bp YoY to 4.7% (+60bp QoQ). Growth rebounds in FMCG; low-margin Food category salience decline
* GM&A: The segment grew ~14% YoY in 3Q (vs. 15% YoY in 2Q), with its share in DMART’s category mix rising 15bp YoY to 22.3%.
* Food: Foods, the largest contributor to DMART’s revenue, saw a moderation in growth to ~12% YoY in 3Q (vs. ~16% YoY in 2QFY26), likely due to deflation. As a result, the category’s contribution declined ~60bp YoY to 57.5%.
* Non-food FMCG: The segment saw a rebound in growth, with ~16% YoY growth (vs. ~13% YoY in 2Q), resulting in its share rising ~45bp YoY to 20.2%. Revenue growth impacted by deflation in staples
* Leadership transition: CEO-designate, Mr. Anshul Asawa, will be appointed as CEO from 1st Feb, 2026, and MD from 1st April, 2026.
* Bill cuts and ABV: Total bill cuts at 103m grew 12% YoY in 3QFY26, while the average basket value (ABV) rose 1% YoY to INR1,710.
* Growth: Revenue growth was partially impacted by deflation in staples.
Valuation and view
* While DMART saw a margin recovery after several quarters, we believe increased pricing competition from QC could prevent margin sustainability and remains a key monitorable in the near term. .
* We believe DMART’s value-focused model and superior store economics would ensure its competitiveness and customer relevance over the longer term, despite QC’s convenience-focused model.
* Acceleration in store addition remains the key growth trigger for DMART. We build in ~60 store additions in FY26.
* We raise our FY26-28 EBITDA and PAT by ~3-5%, primarily driven by higher GM. We build in a CAGR of 16%/16%/12% in DMART’s consol. revenue/EBITDA/PAT over FY25-28E, driven by a 15% CAGR in store additions and ~6% LFL growth.
* We assign a ~43x FY28 EV/EBITDA multiple (implying ~79x FY28 P/E) to arrive at our revised TP of INR4,600 (earlier INR4,300). We reiterate our BUY on DMART.
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