IGI Logo

Margin pressure lingers, CoR remains high

* Avenue Supermarts (DMART) posted another weak set in 1QFY26 as standalone EBITDA grew 8% YoY (5% miss) due to weaker gross margin (GM; -25bp YoY) and higher cost of retailing (CoR; up 9% YoY on a per sqft basis).

* Standalone revenue grew ~16% YoY, driven by ~14% store area addition. Like-for-like (LFL) growth for over two-year-old stores moderated to 7.1% (vs. 8.1%/9.1% in 4QFY25/1QFY25) due to deflation.

* DMART added 9 stores in 1QFY26 (vs. 6 in 1QFY25). Acceleration in the pace of store additions continues to be the primary growth driver for DMART.

* GM contracted ~27bp YoY to 14.6% (~25bp miss) due to ~15bp YoY decline in the share of the higher-margin GM&A category and continued heightened competition in the FMCG category.

* A surge in wages of entry-level positions and continued investments in improving service levels led to further ~24% YoY rise in operating expenses, translating into ~9% YoY uptick in CoR/sqft.

* With the entry of large offline/online retailers into quick commerce (QC), we expect pricing competition to remain intense over the near term, which could weigh on growth and margins for DMART in the interim. However, we believe DMART’s superior store economics would ensure its competitiveness and relevance to customers over the longer term.

* We cut our FY26-28E EBITDA by ~2-3% due to lingering pressure on GM and rising CoR, while we reduce our FY26-28E EPS by ~5-6% on higher finance cost.

* We build in a CAGR of 18%/17%/15% in DMART’s consol. revenue/EBITDA/PAT over FY25-28E.

* Reiterate our BUY rating with a revised TP of INR4,500 (vs. INR4,800 earlier), premised on ~46x Jun’27E EV/EBITDA (implies ~80x Jun’27E P/E)

5%/7% miss on EBITDA/PAT due to continued margin pressures

* Standalone revenue grew ~16% YoY to INR159b (in line), driven by ~14% area additions and 7.1% LFL growth (vs. 8.1% in 4Q and 9.1% YoY).

* Management indicated that revenue growth was lower by ~100-150bp due to deflation in several categories.

* DMart added 9 stores/0.4m sqft area to reach to 424 stores/17.6m sqft. This implies addition of an average ~44.5k sqft stores in 1Q (higher than average store size of 41.5k sqft).

* DMart’s store count was up ~14% YoY, while annualized revenue per store rose ~2% YoY to INR1.52b and annualized revenue/sqft grew ~2% YoY to INR36.6k.

* Standalone gross profit came in at INR23.3b (up ~14% YoY, 2% miss) as gross margin contracted 27bp YoY to 14.6% (~25bp miss).

* Share of higher-margin GM&A category dipped ~15bp YoY to 24.7%, while Foods category share was up ~80bp YoY to 55.6%.

* Management indicated that increased competitive intensity in the FMCG continued to impact gross margins.

* Standalone EBITDA at INR13.1b (~5% miss) was up ~8% YoY, as margins contracted ~65bp YoY to 8.2% (~40bp miss) due to weaker GM and higher employee costs, as CoR per sqft was up ~9% YoY.

* Employee expenses grew 31% YoY (8% ahead), while other expenses rose ~21% YoY.

* Management indicated that operating costs remain elevated due to efforts on improving service levels, capacity building and inflation in entry-level wages.

* Standalone PAT at INR8.3b (7% miss) was up by a modest ~2% YoY, and PAT margin contracted ~70bp YoY to 5.2%.

Higher operating losses in subsidiary impact consolidated performance

* Consolidated revenue grew 16% YoY to INR163.6b (in line).

* Consol. GP grew 14% YoY to INR25b (2% miss) as margins contracted ~30bp YoY to 15.3% (~30bp miss).

* Consol. EBITDA was up 6% YoY at INR13b (5% miss) as margins contracted ~75bp YoY to 7.9% (~35bp miss) due to weaker standalone performance and ~3.3% operating loss margin in subsidiaries (vs. +0.5% YoY, but better than -6.4% QoQ).

* Consol PAT was flat YoY at INR7.7b (6% miss). PAT margins declined ~80bp YoY to 4.7%.

Competitive intensity continues to weigh on margins

* Deflationary impact: Revenue growth was impacted by ~100-150bp, primarily due to significant deflation in several staples and non-food categories.

* Competitive intensity: Gross margins declined YoY, driven by sustained competitive intensity within the FMCG sector.

* Elevated operating costs: Operating costs increased, led by investments in enhancing service levels, capacity building, and higher entry-level wage inflation.

* Bill cuts and ABV: Total bill cuts for 1QFY26 stood at 97m, up ~13% YoY (~16% YoY in 4QFY25), while 1QFY26 average basket value (ABV) was up 3% YoY at INR1,642.

* DMart Ready: The company rationalized its operations in Anand (GJ) and is now present in 24 cities.

Valuation and view

* With the entry of large offline/online retailers into QC and recent fundraising by the top 3 QC players, the competitive intensity for a share of customer wallets is likely to remain elevated in the near term.

* We believe DMART’s value-focused model and superior store economics would ensure its competitiveness and customer relevance over the long term, despite QC’s convenience-focused model. However, rising competition on pricing could continue to weigh on DMART’s growth and margins in the near term.

* Acceleration in store addition remains the key growth trigger for DMART. We build in ~60 store additions in FY26 (vs. 9/50 store additions in 1QFY26/FY25).

* We cut our FY26-28E EBITDA by ~2-3% due to lingering pressure on GM and rising CoR, while we reduce FY26-28E EPS by ~5-6% on higher finance cost.

* We build in a CAGR of 18%/17%/15% in DMART’s consol. revenue/EBITDA/PAT over FY25-28E.

* We assign a ~46x Jun’27 EV/EBITDA multiple (implying ~80x Jun’27 P/E) to arrive at our revised TP of INR4,500. We reiterate our BUY rating on DMART.

GM&A share down ~16bp YoY; non-food FMCG growth remains weak

* General merchandise and apparel (GM&A): The growth was slightly better at ~15% YoY (vs. ~14% YoY in 4QFY25).

* Food: Foods, the largest contributor to DMart’s revenue, saw moderation in growth to ~18% YoY (vs. ~20% YoY in 4QFY25).

* Non-food FMCG: The non-food FMCG continued to be the weakest segment but saw some recovery with ~13% YoY growth in 1Q (vs. ~11% YoY in 4QFY25).

* The share of higher-margin GM&A in DMart’s mix moderated by ~16bp YoY to 24.7% in 1QFY26 (FY25: 22.3%).

* Foods contribution increased ~80bp YoY to 55.6% in 1QFY26 (FY25: 57.7%).

* Non-food FMCG segment contribution moderated by ~63bp YoY to 19.7% in 1QFY26 (FY25: 20%).

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412