Brokerages mixed on Avenue Supermarts post Q1 results; here's what they say

Jefferies maintains 'Hold' rating on the stock as the management is watchful of 'potential volume stress' in discretionary segments due to inflation

Better-than-expected results by Avenue Supermarts, the owner and operator of D-Mart chain of stores, triggered a 3.8-per cent rally in the shares of the company in the intra-day trade on Monday. The shares, eventually, closed at Rs 3,979 apiece on the BSE, up 0.94 per cent, as against a 0.16 per cent fall in the benchmark S&P BSE Sensex.

This comes even as most brokerages remained cautious on the stock on the back of higher inflation leading to downtrading by consumers. 

"D-Mart's anchor variable (footfalls/sales density) remains suboptimal vis-à-vis the pre-pandemic days (partly attributable to the step-up in store additions/size). While we factor in recovery for FY22-24, this assumption stands at risk, given the heightened competitive intensity from deep-pocketed retailers. Hence, we maintain SELL," HDFC Securities said in a post-result update.

Over the weekend, Avenue Supermarts reported over six-fold jump in its consolidated net profit to Rs 642.89 crore for the quarter ended on June 30, 2022. The company had posted a net profit of Rs 95.36 crore in the April-June quarter a year ago.

Moreover, its revenue from operations soared 93.66 per cent to Rs 10,038.07 crore during the quarter under review as against Rs 5,183.12 crore in the corresponding quarter last fiscal. Consolidated/standalone gross margin was at 16.3 per cent/15.8 per cent, closer to pre-Covid levels. Consolidated Ebitda margin touched 10 per cent, 30 basis points below pre-Covid levels, while standalone Ebitda margin reached pre-Covid levels of 10.3 per cent.
 

Here's how key brokerages interpret the results:

Jefferies | Hold | Rs 3,900

Even as Avenue Supermarts beat Q1 estimates on better gross margin, the product mix is yet to fully recover to pre-pandemic levels. Besides, the management is watchful of "potential volume stress" in discretionary segments. 

JM Financial | Buy | Rs 4,330

We believe that a near-16 per cent gross margin and over 10 per cent operating margin lend flexibilities to the business to sharpen its value-propositions (viz. reduce selling prices further) and get on to a higher growth path. 

If history is any sort of a guide (CY2018), this is quite likely to happen and is possibly the next big trigger for the stock. We remain bullish on the long growth runway offered by the business such that the stock can offer double-digit compounding over the coming five years.

Motilal Oswal Financial Services | Neutral | Rs 3,500

Older stores are delivering value growth, led by volume growth in Discretionary products. This is the best reflection of the strength of D-Mart's business, competitive impact, and the local economy. But revenue per square feet remains under pressure due to the impact of inflation on the Discretionary category and higher store sizes.

We factor in a strong FY22-24E Ebitda and net profit CAGR of 37 per cent and 50 per cent, respectively, with a 17 per cent footprint CAGR. We are cognizant of the prominence of new age grocery models, rich valuation, and weak revenue per square feet in the last few quarters. 

HDFC Securities | Sell | Rs 2,700

Given higher-than-pre-pandemic average order value (AoVs), cuts in bills/store are likely to run deeper. Management, too, indirectly alluded to this trend in its press release. We suspect this is not just a function of high inflation keeping discretionary purchases in check but also a consequence of a fair challenge to D-Mart's value proposition by deep-pocketed peers.

Kotak Institutional Equities | Sell | Rs 3,530

New store expansion has picked up pace with 56 new stores added in the past four quarters; compared to 38 and 21 stores added in FY20 and FY21, respectively. As of now, it is difficult to say whether the current pace of store expansion will sustain or if there is still an element of catch-up for lower store addition during Covid period.

We increase our store addition forecasts to 45/50/55 over FY23/24/25 from 40/50/52 earlier. Dmart Ready is present in 12 cities and no new cities were added in Q1FY23 implying calibrated approach to e-commerce. We increase FY23 EPS estimates by 4 per cent, but run-up in stock price drives downgrade to SELL (from REDUCE).