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QC Competition to Cap Growth and Margins

We cut our FY27/FY28/FY29 estimates by 4.4%/3.2%/4.4% and rating from Hold to Reduce, driven by

1) heightened competitive intensity from QC players

2) limited pricing power amid commodity inflation, capping margin upside

3) continued muted store metrics. Q2FY27 results missed our estimates as lower GM, higher interest cost and lower other income affected profitability. Gross margin remained under pressure as D’Mart was unable to pass on commodity inflation amid heightened competition from QC players, with no meaningful competitive relief in sight. Store metrics remained muted, with sales/store and sales/sq. ft. declining by 0.7% and 0.1% YoY, respectively. Bill cuts grew 14.4% YoY, led by 76 store additions over the last three quarters; however, bills/store/day declined by 4.1%, reflecting dilution in store throughput as share of new clusters improves.

Moreover, D’Mart Ready is confined to 11 cities and D’Mart does not have any new playbook to counter and participate in fast consumer shift towards QC. We build in EBITDA margins of 7.3%/7.1%/7.0% for FY28/FY29/FY30, respectively, vs. 7.5% in FY26 with ~75 store additions annually in FY27/FY28/FY29. We estimate an EPS CAGR of 13.2% over FY26–29 and value D’Mart at 52xSept28 EPS (DCF earlier) and arrive at a TP of Rs3,214 (Rs4,027 earlier). We cut rating from HOLD to Reduce, given rich valuations of 61x/53.3x FY28E/FY29E EPS, sustained competition from QC, limited success of D’Mart Ready and deterioration in ROE from 16.5% in FY23 to current levels of 12.8%.

Financial Highlights

* Consol Revenues grew by 17.8% YoY to Rs196.7bn. Gross margins contracted by 15bps YoY to 14.9% (PLe:15.4%).

* EBITDA grew by 14.8% YoY to Rs13.9bn (PLe:Rs14.5bn). Margins contracted by 19bps YoY to 7.1%. (PLe 7.4%).

* Cost of Retail expanded by 4bps YoY to 7.8%. Adj PAT grew by 8.5% YoY to Rs7.4bn (PLe:Rs8bn).LFL came at 9.5%

* Bill cuts in Q2 grew by 14.4% YoY to 111mn, while average bill value came at Rs1770 vs Rs1719 in Q2FY26 up 2.9% YoY.

* D’Mart Ready: Focus to remain on existing 11 cities over near term as competition intensifies

Continued competitive pressure from QC impacted growth & margins:

Q2 sales remained impacted by heightened competition from QC, which continued to drive a shift towards online channels and weigh on store footfalls, particularly in urban markets. Gross margins remained under pressure as D’Mart was unable to pass on commodity inflation to consumers amid intensifying competition. The sales mix also shifted, with Foods/GM&A share declining by 11bps/17bps YoY, while GM&A share increased by 28bps YoY. We remain cautious on the medium-term outlook, as intensifying QC competition in urban markets and narrowing price gap are likely to structurally constrain growth and margins.

Adds 15 stores in 2Q, store size increased QoQ:

D’Mart added 15 stores in 2QFY27 (vs. 3 stores in 1QFY27), taking the total store count to 518 with retail business area expanding to 21.4 mn sq. ft (vs. 20.7 mn sq. ft in 1QFY27). The average area per new store increased to ~46.6k sq. ft in 2QFY27, compared to 33.3k sq. ft in 1QFY27

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