Hold Avenue Supermarts Ltd For Target Rs.4,103 by Prabhudas Liladhar Capital Ltd
Quick commerce continues to dent growth prospects
D’Mart numbers were largely in line with our estimates, with sales/store and sales/ft declining by 3.7% and 3.0%, respectively. Bill cuts increased by 13.4% YoY, led by the addition of 58 stores in 4Q; however, bills/store/day declined by 5.1%, reflecting the impact of elevated store openings in 4Q on store throughput. Non-metro stores grew ahead of metro stores, while older stores in metro areas witnessed flattish growth. We continue to remain cautious on the stock, given
1) Increasing competitive intensity from QC players, which is likely to continue denting metro store performance
2) Sustained deterioration in store metrics
3) Limited scope for margin expansion amidst growth concern while overheads remain at elevated levels.
We believe rising competition from quick commerce is likely to limit growth across Modern trade and D’Mart Ready. D’Mart Ready has exited 14 cities in last 15 months and now is confined to 11 cities with focus on larger towns only. D’Mart plans to raise Rs10bn NCD, we estimate that 1Q27 debt level has increased from Rs11bn to ~25bn YoY. We build in EBITDA margins of 7.4/7.0% for FY27/FY28 versus 7.5% in FY26. We expect the store addition pace to remain elevated with ~75 additions each in FY27/FY28. We estimate an EPS CAGR of 10.7% over FY26–28 and arrive at a DCF-based TP of Rs4103 (No change). We maintain hold with a negative bias given rich valuations of 73.1x on FY28E EPS and limited growth visibility in near term.
Non-performance of metro stores impact sales:
Q1 sales were impacted by continued competitive intensity from quick commerce and a strong summer season, which led consumers, particularly in urban areas, to shift towards online channels and reduce store visits. Non-metro stores outperformed metro stores, while older metro stores witnessed flattish growth. The sales mix also changed meaningfully during the quarter, with Foods share declining by 67/297 bps YoY/QoQ and GM&A share increasing by 74/319 bps YoY/QoQ, reflecting normalization of the stocking that had occurred in Q4. We remain cautious on the medium-term outlook as intensifying competition from quick commerce in urban markets, along with a narrowing price gap, is likely to structurally cap growth and margins.
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