Avenue Supermarts Ltd was supposed to report a rebound in revenues and margins in the June quarter (Q1FY22) over last year’s unusually low base. Avenue runs the DMart chain of stores.
While revenues did indeed bounce back, its gross margins, strangely, contracted by 129 basis points (bps) year-on-year (y-o-y) to 12.4%. Gross margins were at a 22-quarter low, analysts at Jefferies India Pvt. Ltd said, adding: “It was a surprise that this was even lower than the 13.7% of Q1FY21, which also had an inferior (product) mix, and we are yet to understand the reason for this."
This is striking given that the covid-19 curbs were relatively more stringent in the June 2020 quarter. Sequentially, margins have dropped by around 200bps.
Commenting on the gross margin performance, analysts from JM Financial Institutional Securities Ltd said: “We believe the debate on heightened competitive intensity in the grocery space (more so given JioMart’s increased aggression in the past one year) could possibly take centre-stage again, till it’s settled one way or the other." The broker further added: “Our view, though, is that DMart’s prices are mostly getting matched, and there is no race to outdo each other just yet."
With the Tata group taking over BigBasket, Zomato investing in Grofers and given the continued aggression of Amazon India, the grocery space is as tough as ever to generate profits.
DMart’s results also showed the impact of restrictions owing to the second covid wave. Overall, while the Q1 net profit has more than doubled y-o-y to ₹115 crore, earnings were far lower compared to pre-covid levels. In Q1FY20, for instance, profits stood at over ₹330 crore. Operating profit margins improved compared to last year’s low base. DMart’s other expenses declined by 9% y-o-y, which helped. Even so, it’s worth noting that operating margins, too, declined on a sequential basis.
DMart’s revenues increased robustly by 31% y-o-y to ₹5,032 crore, helped by a favourable base. “Across these multiple periods of lockdowns, we have come to realize that a store needs at least 45 days of unhindered operational time to get back to pre-covid sales momentum," said DMart while announcing the quarterly results.
Valuations of the DMart stock are pricey, trading at about 87 times estimated earnings for FY23, based on Bloomberg data. This should limit significant upsides in the near future. There are risks ahead such as a possibility of moderation in growth due to higher competition from the likes of Amazon and Reliance Retail, whose pockets are deep. However, the stock enjoys a scarcity premium, which offers cushion to valuations to that extent.
