Sell Avenue Supermarts Ltd for the Target 3,700 by Emkay Global Financial Services Ltd
We maintain SELL on DMART with unchanged TP of Rs3,700 (54x Jun-28E EPS), on slow TAM expansion, fading USP of value/assortment vs Q-Com, deteriorating RoIC, and expensive valuation at ~70x 1Y fwd PER. DMART saw a lacklustre 1Q, with 15%/13% revenue/PAT growth, albeit in-line. Primary disappointments stem from slower growth in bill size (up only 1.5%) and likely slower ramp-up in new store adds. After a bump in 4Q, LFL growth normalized to 5.5% in 1Q, largely led by maturing of new stores, with older stores in large metros seeing a flat growth trend. Revenue mix improved, with faster growth in the General Merchandise and Apparel segment (up ~19%), driving a ~50bps gross-margin gain. However, ongoing growth investments restricted EBITDA margin gain to ~10bps and led to slower PAT growth of 13%. DMart Ready has further curtailed operations to 11 cities, resulting in lower net subsidiary revenue growth of ~6%; net subsidiary loss in 1Q was Rs753mn (vs Rs569mn loss yoy). The Board approved issuance of Rs10bn non-convertible debentures, highlighting the need for constant external capital for growth.
New stores likely seeing slower ramp-up; bill value growth slower vs estimates
1Q standalone revenue was up ~15% yoy, at Rs183bn, led by 13.4% growth in bill cuts and the rest via increase in average bill value (1.5% in 1Q vs 2.5% in FY26). LFL growth at 5.5% has normalized after a bump in 4Q. Management highlighted that growth in older stores in large metros was flat. However, non-metro stores continue to grow well. During the quarter, 3 new stores were added (vs 9 in 1QFY26), taking the overall store count to 503. Average size of a new store was 26.7k sqft in 1QFY27 vs the typical 40k sqft; we will watch this metric for a few more quarters to establish if there is an underlying change in strategy. Among segments, the General Merchandise and Apparel segment grew faster at ~19% in 1Q vs 14%/15% growth in the Foods/Non-Foods segments
EBITDA/PAT growth a tad lower than expectations
Standalone gross margin (GM) at 15.1% was up by ~50bps yoy, likely aided by a higher mix of general merchandise and apparel (up by ~74bps) at 25.5%. EBITDA margin improved marginally by ~10bps to 8.3%, as improvement in GM was largely offset by higher employee expenses (up by ~30bps yoy) and higher other expenses (up by ~10bps yoy). Absolute EBITDA at Rs15.3bn was up ~16%, while PAT grew by ~13% (1.5% lower than our expectations), with the lower growth reflecting higher interest cost at Rs506mn (vs Rs266mn in 1QFY26) and elevated depreciation cost.
Subs revenue growth moderates; DMart Ready store rationalization continues
Subsidiaries' revenue grew 5.5% yoy in 1Q (vs 17-18% in 4Q/FY26), while EBITDA loss stood at Rs276 (vs loss of Rs 206mn in 4QFY26). During the quarter, the company further rationalized its operations by discontinuing DMart Ready in 7 cities. Company focus remains on strengthening presence in large metro markets, with DMart Ready currently operating in 11 cities, as of end-1QFY27. Consolidated yoy revenue/EBITDA/PAT growth stood at 14.9%/15.4%/11.3%, respectively, in 1QFY27.
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