Sell Avenue Supermarts Ltd for the Target Rs 3,300 by Emkay Global Financial Services Ltd
We maintain SELL on DMART, as we reduce our TP/multiple by ~10% to Rs3,300 (vs Rs3,700 earlier; 47x Sep-28E EPS), given slow TAM expansion, deteriorating ROIC, moderating earnings growth, and increasing debt. After reporting ~18% topline growth, DMART saw muted PAT growth of ~8% in 2Q, ~14%/8% lower than our/street estimates. While LFL growth was healthy at 9.5% (>24 months old), primary disappointments stemmed from a likely lower growth contribution from newer stores (<24 months old), ~60bps gross-margin miss, and high wage inflation. This, along with higher depreciation and interest expense, led to slow PAT growth of ~8% in 2Q. Gross debt rose to Rs26bn at 1HFY27-end (vs ~Rs10bn at FY26-end), likely due to negative FCF of Rs16.5bn in 1HFY27 (vs negative FCF of ~Rs4bn in 1HFY26). The FCF decline was led by low earnings growth, increase in inventory (36.1 vs 33.9 days yoy), and higher capex (Rs21bn in 1HFY27 vs Rs17bn in 1HFY26). Subsidiary revenue declined ~4% in 2Q, likely due to the consolidation of operations to 11 cities. This was reflected in a lower EBITDA loss of Rs102mn in 2Q (vs Rs163mn loss yoy).
New stores likely seeing slower ramp-up though LFL growth healthy
2Q standalone revenue was up ~18% yoy, at Rs192bn, led by 14.4% growth in bill cuts and the rest via an increase in average bill value (up 3.5% in 2Q). LFL growth at 9.5% improved vs 10.8%/5.5% over the last two quarters. The company added 15 stores in 2Q (vs 3 in 1QFY27) taking the total count to 518, which implies a ~19% yoy addition in retail area (vs 13-14% addition before 4QFY26). However, both accelerated store expansion and inflationary trends have not contributed to a commensurate increase in growth so far. Average new store size increased to 46.6k sqft in 2QFY27, reverting to the typical ~40k sqft level after smaller ~26k sqft stores were added in 1QFY27. Among segments, Foods grew marginally faster at ~19% in 2Q vs 17%/18% growth in the NonFoods/General Merchandise and Apparel segments.
EBITDA/PAT growth significantly lower than expectations
Standalone gross margin (GM) at 14.15% was down ~10bps yoy, likely due to a higher mix of the Foods segment (up ~40bps) at 58.8%. EBITDA margin saw a higher decline of ~30bps to 7.3%, as other expenses saw an increase of ~15bps, likely due to minimum wage hikes for entry-level employees (likely contractual). Employee expense was largely flat. Absolute EBITDA at Rs14bn was up ~14%, while PAT grew by ~8% (~14%/8% lower than our/consensus expectations), with the lower growth reflecting lower margins, higher interest cost at Rs596mn (vs Rs318mn in 2QFY26) and elevated depreciation cost.
Subsidiaries’ revenue sees a yoy decline, though EBITDA losses narrow
Subsidiaries’ revenue declined 4.3% yoy in 2QFY27 (vs growth of 5.5% in 1QFY27), likely impacted by the reduction in DMart Ready’s operational presence to 11 cities in 1HFY27 from 19 cities in 1HFY26. However, subsidiaries’ EBITDA losses narrowed to Rs102mn (vs a loss of Rs163mn in 2QFY26). DMART’s consolidated yoy revenue/EBITDA/PAT growth stood at 17.8%/14.8%/8.5%, respectively, in 2QFY27.
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