Avenue Supermarts Share Price Declines Post Q1 Results: Brokerages’ Analysis of Financial Performance

Avenue Supermarts, the parent company of the renowned supermarket chain D-Mart, witnessed a decline in its share price by over 1% in response to its muted Q1FY24 (April-June) results. The trading session commenced with Avenue Supermarts shares opening at an intraday high of ₹3,802 apiece on the Bombay Stock Exchange (BSE).

The retail chain D-Mart’s operator reported a modest 2.46% increase in its consolidated net profit, amounting to ₹658.71 crore, primarily due to lower sales of apparel and general products. In comparison, during the same quarter in the previous year, the company had reported a net profit of ₹642.89 crore.

During the reviewed quarter, the operating revenue of the retail chain D-Mart operator witnessed a significant increase of 18.20%, amounting to ₹11,865.44 crore. This substantial growth in operating revenue is in comparison to the revenue of ₹10,038.07 crore recorded during the same quarter in the previous fiscal year.

Neville Noronha, the Chief Executive Officer & Managing Director of the company, provided insights into the company’s financial performance, stating that overall gross margins were lower compared to the same period in the previous year. The primary reason behind this decline in gross margins was the lower sales contribution from the apparel and general merchandise segments.

The challenges faced in the apparel and general merchandise categories impacted the company’s profitability during the reviewed period. However, there is a positive note as Neville Noronha mentioned that the contribution from the general merchandise segment is recovering and showing signs of improvement. It is trending towards pre-pandemic levels, indicating a potential rebound in sales and an encouraging sign for the company’s future prospects.

The recovery in general merchandise sales is a significant development for the company, and it reflects the management’s efforts to adapt and respond to changing market dynamics. As the general merchandise segment shows signs of improvement, it could positively impact the company’s overall gross margins and financial performance in subsequent quarters.

Investors and stakeholders should closely monitor the company’s progress in reviving the general merchandise segment and consider this information along with other financial metrics when evaluating the company’s performance and potential for future growth.

As the retail industry continues to navigate through the uncertainties brought about by the pandemic and evolving consumer behavior, the management’s ability to execute effective strategies will play a crucial role in determining the company’s success and shareholder value. Investors should exercise diligence and conduct thorough research before making any investment decisions related to the company’s shares.

According to trendlyne data, the stock price of the company has experienced a decline of 4.2% over the past year. This downward movement in the stock price indicates a decrease in investor confidence or potential challenges faced by the company during this period.

Furthermore, the stock’s performance has been weaker compared to its sector, as it underperformed by 14.8%. This means that while the broader sector may have seen more favorable stock price movements or overall growth, the company’s stock has not kept pace and has lagged behind its peers.

Rajesh Bhosale, an Equity Technical and Derivative Analyst from Angel One, provided an analysis of the stock’s current situation. According to him, the stock has not seen significant upward momentum and has corrected from its recent peak of 4150. Presently, it appears to be consolidating around its 200-day Simple Moving Average (SMA) at approximately 3700.

The stock’s behavior around the 200-day SMA is crucial, as a break below this level could signal further weakness and potentially lead to a downward trend. Such a breakdown might indicate a bearish sentiment among investors, potentially driving the stock’s price lower.

On the other hand, Rajesh Bhosale mentioned that 4000 acts as an immediate resistance level for the stock. A resistance level is a price point where the stock faces selling pressure, hindering its ability to rise further. Breaking above this resistance level could be seen as a positive signal, potentially leading to renewed buying interest and upward price movement.

What is the Statement Made by Brokerage Firms?

Nuvama Institutional Equities

According to Nuvama Institutional Equities’ research report, the company’s Q1FY24 performance was lackluster, with EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and PAT (Profit After Tax) figures coming in 11% below forecasts (consensus estimates were 10% and 7%, respectively). The main contributor to this underperformance was a weak gross margin of 14.6%, which was lower than the estimated 15.5% and declined by 120 basis points compared to the previous year (pre-covid Q1 average was 15.7%).

The brokerage attributed the decline in gross margin to a lower mix of general merchandise and apparel (GM&A). This suggests that sales in these segments were not as strong as expected, leading to margin pressure for the company.

In response to the lower gross margin and Q1FY24 performance miss, Nuvama Institutional Equities is adjusting down its FY24E (full-year fiscal 2024) PAT estimate by 3%. The brokerage values DMart (the company) at 70x Price-to-Earnings (PE) ratio, which is marginally lower than its pre-covid one-year forward PE average of 74x. They are rolling over to Q1FY26E (first quarter of fiscal 2026), resulting in a revised target price of ₹4,015 (compared to the previous ₹3,913 target price). Despite the adjustments, the brokerage maintains a ‘HOLD’ recommendation for the stock.

The key concern raised by Nuvama Institutional Equities is whether the change in product mix and GM&A profile is transient (temporary) or indicative of a structural shift in the company’s operations. While management mentioned that the mix is expected to improve and trend towards pre-pandemic levels, the Q1FY24 performance did not show any improvement over the previous year. As such, further clarity from the company’s management is awaited to address this concern.

Kotak Institutional Equities 

According to Kotak Institutional Equities’ analysis, Dmart’s revenue growth in 1QFY24 (first quarter of fiscal 2024) was primarily driven by an 11.6% year-on-year (YoY) increase in retail area addition and some sequential improvement in core same store sales growth (SSSG). This combination led to a robust 18% YoY growth in revenue for the company during the quarter.

However, despite the healthy revenue growth, the gross margin print was weaker at 15.2%. The brokerage attributes this to the lower mix of general merchandise and apparel (GM&A). Additionally, they believe that price competition in the market may have also influenced margins during the quarter. Typically, this quarter is when margins are expected to be at their highest for the year.

Moreover, a 5% EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) miss from GM (Gross Margin) was another contributing factor to the company’s weak performance. This resulted in a modest 2.5% YoY increase in net profit, indicating that the company faced challenges in maintaining profit growth.

Based on their analysis, Kotak Institutional Equities is revising down the revenue estimates for FY2024-26 by 1-4%, leading to a 2-6% cut in earnings per share (EPS). However, they maintain an unchanged fair value (FV) target of ₹3,475 for the company. The brokerage retains a cautious stance on the stock and advises a ‘SELL’ rating.

JM Financial

In its analysis, JM Financial stated that DMart’s June quarter results were not significantly different from those of recent quarters. While there was a slight improvement compared to previous quarters, the sales per store growth was still considered insufficient given the company’s full potential.

One of the key challenges highlighted by the brokerage was the persistent weakness in discretionary sales, which impacted gross margins and throughput. This also had implications for the company’s operating leverage.

Despite these challenges, the management remains optimistic about the situation. According to them, the contribution from the general merchandise segment is recovering and trending towards pre-pandemic levels. However, the apparel sector is still in need of improvement. If this area of the portfolio experiences a turnaround, it could positively impact gross margins and help the company regain scale efficiency.

JM Financial believes that the improvement in the apparel sector is a matter of “when” and not “if.” The brokerage continues to have a positive outlook on DMart, recognizing the rarity of businesses with such long growth runways. They advise investors not to be overly concerned about short-term weaknesses.

As a result, JM Financial maintains a “buy” rating on the stock and keeps the price target at ₹4,255, predicting a 10.6% increase from the stock’s current market price of ₹3,846.