Buy Avenue Supermarts Ltd for the Target Rs.4,950 by Motilal Oswal Financial Services Ltd
Pressing the growth pedal
We attended Avenue Supermarts (DMart)’s FY25 analyst meet, wherein the management indicated acceleration in store additions as the utmost priority. Further, management believes the margin contraction due to improving service levels over the past several quarters is largely behind.
* Management acknowledged that store additions could have been accelerated in the last few years. While management continues to aim for 10-20% net area additions annually (~14% YoY in FY25), acceleration of store additions is the utmost priority and seen as the best way to tackle the rising competition from Quick Commerce (QC).
* DMart’s LFL growth moderated ~150bp YoY, primarily due to the impact from QC on its high-throughput metro stores. However, despite competition from QC in FMCG, gross margins were stable YoY in FY25.
* DMart indicated that ~40bp EBITDA margin compression was primarily driven by the company’s efforts to improve the service levels in highthroughput stores. However, it believes the impact on margin is likely baked in now, and there is some room to calibrate these investments.
* DMart Ready is not looking to get into <1 hour delivery. However, it will look to shrink the order fulfilment timelines to about six hours, while continuing to focus on achieving breakeven over the next few years.
* Acceleration in store addition remains the key growth trigger for DMart. We model ~60 store additions in FY26 (vs. 9/50 store additions in 1QFY26/FY25).
* We raise our FY26-28E EBITDA and PAT by ~2-4% as the increase in CoR (primarily related to staff costs to improve service levels) normalizes.
* We build in a consol. revenue/EBITDA/PAT CAGR of 19%/20%/18% over FY25-28E, driven by ~14-15% CAGR in retail store/area and a high singledigit LFL growth.
* We assign a ~46x Sep’27 EV/EBITDA multiple (implying ~80x Sep’27 P/E) to arrive at our revised TP of INR4,950 (earlier INR4,500). We reiterate our BUY rating on the stock.
Pressing the growth pedal by accelerating store additions
* DMart acknowledged that store additions could have been accelerated in the last few years, and it should have had ~600-625 stores by now (vs. ~425 currently).
* However, with more management bandwidth available now, accelerating store additions would be the utmost priority, especially in North India and UP clusters, where DMart is under-indexed.
* Further, management believes that acceleration in DMart’s physical stores is the best way to tackle the rising competition from QC.
* Over the long term, management remains bullish on the long growth runway for the efficient brick-and-mortar value retailer and pegged the long-term potential at ~2,200-2,300 stores for DMart.
QC impact limited to metro cities; DMart’s gross margin a key moat.
* DMart’s LFL growth moderated ~150bp YoY, primarily due to the impact from QC (and also DMart Ready scale-up) on its high-throughput metro stores. However, the company didn’t witness any significant impact on growth due to QC on its non-metro stores.
* However, despite intense pricing competition from QC in the FMCG category, DMart’s gross margins were stable YoY in FY25.
* Management believes that DMart’s superior value proposition, operational efficiency, and localized customer understanding provide it a competitive moat against the emerging formats.
* Improvement in the share of private labels (though it would take a reasonably longer time) and forays into other horizontal categories (aligned with DMart’s model) could act as potential levers for margin improvement.
Margin impact mainly due to the focus on improving service levels
* Driven by intensifying competition from QC, DMart focused on improving service levels (improved product availability, faster checkout) in its Metro stores over the past few quarters.
* DMart’s 40bp margin contraction in FY25 was mainly due to higher employee and contract labor costs as a result of its focus on improving service levels, inflation in warehouse employee costs, and planned hirings for its headquarter, considering the impending management transition.
* However, management believes that margin contraction due to improvement in service levels is now largely behind, and there is some room to calibrate these investments going forward.
DMart Ready: Looking to reduce delivery timelines to ~6 hours
* Overall, management remains content with the progress of the DMart Ready business (revenue up ~20% YoY in FY25).
* DMart Ready has pivoted its business model to focus primarily on home delivery (vs. a mix of pickup and home delivery earlier).
* DMart Ready continues to position itself as a superior value offering with convenience and has been working on shrinking the order fulfillment timelines further to about six hours.
* However, management noted that there is no plan to shift to <1 hour delivery timelines, and focus would continue to remain on achieving breakeven in DMart Ready over the medium term.
Valuation and view
* With the entry of large offline/online retailers into quick commerce 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 despite QC’s conveniencefocused model over the longer term. However, intense pricing competition 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 model ~60 store additions in FY26 (vs. 9/50 store additions in 1QFY26/FY25).
* We raise our FY26-28E EBITDA and PAT by ~2-4% as the increase in CoR (primarily related to staff costs to improve service levels) normalizes.
* We model a consol. revenue/EBITDA/PAT CAGR of 19%/20%/18% over FY25- 28E, driven by ~14-15% CAGR in retail store/area and a high single-digit LFL growth.
* We assign a ~46x Sep’27 EV/EBITDA multiple (implying ~80x Sep’27 P/E) to arrive at our revised TP of INR4,950 (earlier INR4,500). The increase in our TP is primarily driven by a modest EBITDA increase and roll-forward to Sep’27 (from Jun’27 earlier). We reiterate our BUY rating on the stock.
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