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Stable performance

Dmart’s Jun-Q earnings print was tad better than our expectations on profitability front. Growth in sales per sq. ft. (+4.4% yoy), is broadly tracking the trajectory (4-6%) seen in recent quarters. Operating performance was tad better than expectation – a function of improved mix. We reckon that base quarter had weaker mix as General Merchandise was recovering while Apparels category was under pressure. However, the trajectory for the discretionary portfolio started to see improving trends from 2HFY24 and same has continued in 1QFY25, resulting in better than expected gross margins for the quarter. Management commentary also alludes to the same. However, sales per sq. ft. and gross margins are still below pre-pandemic levels. With gradual recovery in consumer sentiments/demand trends especially in lower income cohort, one should see uptick in salience of discretionary categories to continue in coming quarters, which we believe will aid gross margins and also bring scale-efficiencies back into the business. Pace of store expansion and discretionary contribution to sales will be key monitorables. We continue to like DMart - businesses with such long growth runways are rare, any weakness in the name should be looked as an opportunity to add.

* Operationally tad better than expectations: DMart’s 1QFY25 revenue grew 18.4% yoy (+10.6% qoq) to INR137.1bn (standalone), which was known from the pre-quarter update. EBITDA and net profit grew by 17.8% and 16.8% to INR12.2bn and INR 8.1bn respectively – tad better than our expectations. Store count increased 13.5% yoy to 371 with 6 new stores (including one store at Rajkot, Gujarat which was temporarily closed for customers) added during Jun-Q. Store additions are typically lower in first quarter and picks up in 2H. Average sales per store grew 4.7% yoy (+4.4% yoy in per sq. ft. basis), broadly within the trend seen in past 2-3 quarters (+5-7% yoy) 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. We note that base quarter was impacted by weakness in General Merchandise & Apparels category and the same started to see encouraging trends from 3QFY24, resulting in better mix on yoy basis in the quarter. Subsidiaries’ (mainly DMart Ready) revenue grew 27.1% yoy (+7.3% qoq) with losses similar to trends seen in past few quarters.

* Better mix drives yoy gross margin expansion: DMart’s 1QFY25 EBITDA performance was tad better than what we expected, primarily due to better-than-expected gross margins. A better mix led to gross margin improving by 34bps yoy to 14.9% (JMFe: 14.5%). Management attributed uptick in margins to higher contribution from General Merchandise and Apparels category. However, the gross margins are still lower vs prepandemic levels (15.6%/16.1% seen in 1QFY19/20) as well as 1QFY23 (15.8%), indicative of enough headroom to expand the share of discretionary categories. EBITDA grew by 17.8% yoy to INR 12.2bn with margins flat at 8.9%. SG&A grew faster (+26.4% yoy) than revenue (+18.4% yoy) - on a per-store basis, SG&A grew 11.8% vs 4.7% yoy growth in revenue. Increase in operating costs is on account of investments behind building capabilities for future and improving service levels

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