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Margins shielded through cost control

Revival in GM&A category remains a key monitorable

* Avenue Supermarts (DMART)’s consolidated/standalone revenue grew 17% YoY, led by 11% store adds. The stabilization in GM&A contribution, combined with controlled costs, cushioned GM, leading to a flat YoY performance – a sign of recovery. Controlled opex resulted in EBITDA/PAT growing by 16%/17% YoY. Revenue/EBITDA/PAT grew by 18%/10%/3% respectively for 9MFY24.

* The gap between revenue/sqft (up 4% YoY) and revenue/store (up 5% YoY) continue to shrink, indicating an improvement in the share of larger-format stores, marking a positive trend. Further, healthy cost efficiencies and a recovery in discretionary demand are likely to drive growth. We have marginally cut PAT estimates by 3%/1% for FY25E/FY26E. Subsequently, we arrive at our TP of INR4,700 and reiterate our BUY rating on the stock.

In-line numbers; Revenue/PAT grew 17% YoY

* Consolidated/ Standalone revenue grew 17% YoY to INR135.7b/INR132.5b (in line), driven by 11% store additions and 5% revenue/store growth to INR1.56b (annualized).

- The gap between revenue/store growth and revenue/sq.ft. continued to narrow over the past four quarters, implying that the larger stores are in the base.

* The company added five stores in 3QFY24 to reach 341 stores and added 0.29m sqft to reach 14.19m sqft. Stores added in the quarter was an average of 58k sqft, much higher than the average store size added (47.5k sqft) in FY23.

* Consol. Gross Margins remained flat YoY and stood at 14.9% (in line), led by stabilization in the SG&A segment. As a result, Gross profit reported a growth of 18% YoY to INR20.2b (in line). Standalone margins declined 10bp YoY to 14.2%.

* Consolidated EBITDA reported a growth of 16% YoY to INR11.2b (in line). EBITDA margins declined 10bp YoY to 8.3% (in line).

- Standalone EBITDA margin declined 10bp YoY to 8.5%, in line with the decline in gross margin.

* Adjusted PAT grew 17% YoY to INR 6.9b (in line)

Management commentary

* Contribution from General Merchandise and Apparel has stabilized and trends have been encouraging post Diwali.

-Contribution from GM&A declined (down 150bp YoY) in 1HFY24 to 23.21% from 24.75% in 1HFY23, indicating weakness in the category. As per the management, the contribution has stabilized in 3QFY24.

* This time, the festive season sales were lower than expected in the NonFMCG (contributing ~21% of sales) segment.

* Within FMCG, agri-staples (ex-edible oil) are going through significantly high inflation.

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