Hold Avenue Supermarts Ltd For Target Rs. 4,000 Prabhudas Liladhar Capital Ltd
Premium valuation meets structural growth challenges
D-Mart's annual analyst meet reinforced our cautious stance, driven by 1) sustained competitive intensity from quick-commerce players across metro markets, 2) little scope of margin expansion amid rising wage inflation and an adverse sales mix, 3) continuously narrowing pricing moat versus QC players and 4) lack of a clear profitability roadmap for D’Mart Ready. While D’Mart is focusing on MT, we believe rising scale of QC and fast changing consumer preferences poses a major risk to growth. We note that D’Mart Ready, its attempt at Ecom has lost steam over past couple of years
D-Mart incurred capex of Rs41bn in FY26 (vs. Rs13bn in FY20), and we expect this to increase further to ~Rs43bn by FY29. Elevated investments, coupled with margin dilution and an unfavourable mix, have resulted in ROE declining to ~13% in FY26 from ~16% in FY23. We see limited scope for ROE improvement over the medium term, as incremental capex will remain higher than internal cash generation
D-Mart delivered a modest 6.3% EBITDA CAGR over the past four quarters, although we expect the EBITDA growth to recover to double digits from 2QFY27 aided by a favourable base. We factor in 15-16% bill cuts growth, ~2% average bill value growth and ~20bps EBITDA margin contraction over FY26-28, translating into a 14.4% EPS CAGR. While earnings growth is likely to improve versus the past two years, accelerating capex, structurally lower ROE and steep valuation of 65x FY28E EPS limit scop of re-rating over medium term. Retain HOLD.
Analysts meet highlights:
D’Mart to sustain 15% CAGR in store additions
* Management reiterated its long-term target of adding stores equivalent to ~15% of the existing store base annually, although actual additions may vary depending on land acquisition, approvals and construction timelines.
* Store pipeline remains healthy and management is confident of sustaining this expansion trajectory over medium term.
* Company is increasingly open to long-term leased stores, particularly in markets where acquiring suitable land is difficult. Total leased stores increased to 68, with 15 of the 85 stores opened during FY26 being leased.
* Leasing is intended to supplement expansion and does not represent a change in the company’s long-term ownership philosophy.
* Management remains flexible on store size and is willing to open smaller-format stores wherever commercially viable.
Please refer disclaimer at Report
SEBI Registration number is INH000000933.
