Why Dmart Share Price is Falling

Editor's note: After falling 13% in 2022, Radhakishan Damani portfolio stock Avenue Supermarts has started 2023 on a lacklustre note.

So far in 2023, Dmart share price has fallen around 10%. Shares of the company are now trading at six-month lows.

Most of the losses have come in the past two sessions after the company declared its Q3 results.

In November 2022, we wrote about the reasons dragging the fundamentally strong stock lower and what you could expect from the company in 2023.

There have been some new developments after that which need a mention.

Continue reading to find out...

Why Avenue Supermarts Share Price is Falling

The Covid-19 pandemic has finally taken a break, at least in India. There are still concerns in China as the country battles through uncertainty.

The world is slowly and cautiously moving back on its feet. But the aftereffects of the pandemic still continue to hurt the economy.

Rising inflation and increasing costs have hurt businesses globally, which in turn have hurt investor sentiments.

Resultantly, the share price of even fundamentally strong stocks have taken a beating.

Radhakishan Damani's Avenue Supermarts is no exception to this. The company's share price has fallen around 19% in the last one year.

Just as Avenue Supermarts' share price was starting to gain some momentum, minor hurdles have paused the rally. Shares are down 6% in a month.

Read on to find out what is causing the recent fall and how the road ahead looks for Dmart...

Troublesome Second Quarter

For the quarter ended September 2022, Avenue Supermarts posted a total revenue of Rs 106.3 billion (bn) around Rs (10,630 crore). This is 6% higher on a sequential basis and 36% higher on a YoY basis.

Even when we take a look at the profits, the company has done quite well. For the said quarter, Avenue Supermarts reported a profit of Rs 6.9 bn, 64% higher compared to Rs 4.2 bn reported in the corresponding period last year.

If quarterly figures were quite good, what has hurt investor sentiment? the answer is dry margins.

For the September 2022 quarter, the company's gross profit margins fell to 8.4% from the 10% reported in the preceding quarter. However, on a YoY basis, the gross profit margin improved.

The operating profit of the company was Rs 9.3 bn which is 11% lower on a QoQ basis.

Rising inflation is hurting companies across the globe and Avenue Supermarts is not an exception. The total expenses of the company rose by 8% on a sequential basis and 37% on a YoY basis.

The rise in revenues was wiped off by a rise in expenses. Due to this, the net profit margin of the company has remained stagnant.

With the effect of the lockdown finally wearing off, investors expected the company's profit margins to expand. Instead, they are barely back to pre-covid levels.

Some research reports also said that as of September end, the company's stores that are five years or older saw a decent like-for-like 6.5% compound annual growth rate, versus Q2FY20. In a quarter having no covid impact, this is much lower than the pre-covid double-digit trends, potentially hinting at a new normal.

Avenue Supermarts' revenue per square feet in Q2 is lower than the pre-covid level (Q2FY20). This suggests a slower growth rate for the both old stores and new stores of the company.

However, the company has aggressive plans of opening new stores. This move might not be in step with the current market scenario of slow growth.

The group faces strong competition which might further pressurise the margins.

Update: On 14 January 2023, Avenue Supermarts posted its Q3 results which pointed towards a muted show.

On a consolidated basis, the company's profit grew by 6.6% on the back of a 25.5% growth in revenues on a year-on-year (YoY) basis.

Market experts had projected for far better numbers from Avenue Supermarts.

Even gross margins for the quarter came below estimates at 14.8%. EBITDA margins declined by 100 bps to 8.6 in the quarter under review.

In Q2, Dmart was questioned as to why the new stores were facing lower throughput. The same thing happened this quarter, while inflation also weighed on the company.

Investors were disappointed by the dismal show as Dmart reported lower revenue growth, margin contraction, and lower throughput from new stores.

What next?

In the financial year 2021-22, Avenue Supermarts opened 50 stores! This is its highest-ever opening in a year. It has big expansion plans in the pipeline.

The company plans to boost its store count fivefold as it seeks to grow market share and hold its own against aggressive expansion from the likes of Mukesh Ambani's Reliance Retail. However, no timeline has been mentioned for the same.

It currently has 284 retail stores and it plans on reaching a total of 1,500 stores. It is likely to open 135 more Dmart outlets by March 2024.

The Dmart outlets are known for selling everything at cheap prices. It is a big attraction for consumers with a desire for big bargain deals. It will continue to emphasise the same as it wants to tap India's teeming middle class, which according to some researchers could account for as much as half of the country's almost 1.4 bn population.

This mentality of the company also helps in dealing with inflation. In times of inflation, the general understanding is people look for more deals. People want products available at cheaper prices, so it helps a business like Dmart's.

India's organised retail market is still at a nascent stage and is estimated to grow 20-25% annually by the government's export promotion agency.

The competition is growing but so is the market. Dmart's CEO Neville Noronha believes that larger players can happily operate without worrying about each other. He further believes that there's no need to worry about cutthroat competition for another 20 years.

The company also plans to boost its online retail market, which is currently in a bad shape. It also has planned for a number of experiments.

The company plans to add more online fulfilment centres to the two current ones in Mumbai.

It has also been experimenting with a couple of smaller shop formats in Mumbai and Hyderabad, where real estate is expensive.

The company has also moved to selling 'comfort food' now. The CEO said,

• "As the economy grows, people have less time, they want comfort food. We believe we can offer the same high quality at significantly lower prices."

The company has already started selling pizza at cheap prices in some of its stores.

It appears the company has lots of good plans under its wings. But how many of these will get executed and how many will be profitable? Only time will tell.

Barely two decades old, the company has distinguished itself in a crowded and fragmented retail industry.

With its unique strategy of having an ownership model in strategic areas, no frills, customer friendly discount model, and a limited category of products, it has established loyal customer base.

Safe to say that Dmart has rendered the competition irrelevant.

Update: In a new effort, the company started a pharmacy shop-in-shop at one of its stores through a subsidiary, Reflect Healthcare and Retail Private Limited.

About Avenue Supermarts

Avenue Supermarts is an Indian retail corporation that operates a chain of hypermarkets in India. It was founded by Radhakishan Damani in 2002, with its first branch in Powai's Hiranandani gardens.

Its stores are present in Maharashtra, Andhra Pradesh, Telangana, Gujarat, Madhya Pradesh, Chhattisgarh, Rajasthan, National Capital Region, Tamil Nadu, Karnataka, Uttar Pradesh, Daman, and Punjab.

To know more check out the company's factsheet and quarterly results.

You can also compare the company with its peers:

Avenue Supermarts vs V-Mart Retail

Avenue Supermarts vs Spencers Retail

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