Shares of Avenue Supermarts, the parent company of DMart, took a significant hit, plummeting by 9.3% after the release of disappointing Q2 earnings. This downturn prompted several major brokerage firms to downgrade their ratings on the stock. While DMart shares experienced an 8% year-on-year increase in net profit for the September quarter, the profit showed a more than 12% decline compared to the previous quarter. Revenue growth was more promising, rising by 14%. However, escalating costs and increased competition from online grocery services have weighed heavily on the company’s performance.
On October 14, 2024, DMart shares fell by as much as 9.37%, reaching an intraday low of ₹4,143.60. The sharp decline followed the release of the company’s Q2 results, which failed to meet market expectations. Analysts have voiced concerns about the company’s trajectory, citing factors such as decreased store productivity and heightened competition from online grocery formats.
Q2 Performance and Analyst Reactions to DMart Shares
In the September quarter (Q2FY25), DMart reported a net profit increase of 5.8% year-on-year, amounting to ₹659.6 crore, compared to ₹623.6 crore during the same quarter of the previous fiscal year (Q2FY24). Revenue also saw a notable uptick, climbing 14.4% to ₹14,444.5 crore, up from ₹12,624.37 crore in Q2FY24. DMart’s earnings before interest, taxes, depreciation, and amortization (EBITDA) surged by 29.3% to ₹1,093.8 crore, significantly higher than the ₹846 crore recorded a year earlier. As a result, the EBITDA margin improved to 7.6%, up from 6.7% year-on-year.
Analysts at Nuvama attributed the weak Q2FY25 performance primarily to a decline in store productivity. Like-for-like (LFL) growth fell to 5.5% year-on-year, down from 9.1% in Q1FY25, resulting in an H1FY25 LFL growth of 7.4%. Rising operating expenses, aimed at enhancing service levels, have put additional pressure on the EBITDA margin. Moreover, the growth of DMart Ready, the company’s online ordering platform, slowed to 22% year-on-year in H1FY25, a drop from 32% in FY24. The management acknowledged that online grocery competitors are increasingly impacting its high-performing metro stores.
In light of these developments, Nuvama has revised its FY25 estimates for revenue, EBITDA, and profit after tax (PAT) downwards by 3%, 4%, and 7%, respectively. The new target price is set at ₹5,040, a decrease from the previous ₹5,183, while maintaining a ‘Hold’ rating on DMart shares.
Future Outlook and Brokerages’ Ratings on DMart Shares
Analysts from Motilal Oswal emphasized that DMart’s revenue growth heavily depends on expanding its store network. They anticipate an acceleration in store openings in the second half of FY25, projecting 40, 45, and 50 new stores for FY25, FY26, and FY27, respectively. However, recent LFL growth has been negatively impacted by moderating inflation and the rapid rise of quick commerce services.
Motilal Oswal has lowered its revenue projections for FY25 and FY26 by 2% and 4%, respectively, citing that reduced store productivity offsets anticipated higher store additions. They have also adjusted EBITDA estimates for FY25 and FY26 downward by 6% and 10%, respectively, and EPS estimates by 8% and 14%. Despite these adjustments, analysts project a compound annual growth rate (CAGR) of 17% in revenue and 20% in PAT from FY24 to FY27, supported by store expansion and improved productivity. Using a 51x enterprise value/EBITDA multiple for December 2026 estimates, Motilal Oswal has set a target price of ₹5,300 for DMart shares and reaffirmed a ‘Buy’ rating, noting that the stock is currently trading about 10% below its long-term average multiples.
ICICI Securities analysts have observed that the accelerated rise of online grocery formats, particularly quick commerce in large metro cities, has led to a slowdown in key growth metrics for DMart. This quarter marked the lowest revenue growth ever recorded for the company at just 14% year-on-year. The LFL growth was only 5.5%, a substantial drop from previous high-single digits. Foot traffic decreased by 1% quarter-on-quarter, compared to a 4% increase in the same period last year. Although the retail expansion rate remained steady at 14% year-on-year, revenue throughput per store remained flat year-on-year.
In response to these challenges, ICICI Securities has downgraded the stock rating to ‘Reduce’ from ‘Add,’ with a revised target price of ₹4,100 for DMart shares.
Global brokerages have expressed disappointment with DMart’s performance. Morgan Stanley has downgraded Avenue Supermarts to ‘Underweight,’ lowering its target price to ₹3,702 per share. Similarly, JPMorgan has downgraded DMart to ‘Neutral’ from its previous ‘Overweight’ rating, reducing its price target from ₹5,400 to ₹4,700. Goldman Sachs has issued a ‘Sell’ recommendation on DMart, setting a target price of ₹4,000 per share, indicating that the ongoing expansion of quick commerce is likely to continue affecting Avenue Supermarts’ future prospects.
As the competitive landscape evolves, the outlook for DMart shares remains uncertain. The company will need to address the challenges posed by increased competition and rising costs to regain investor confidence and improve its market position.
You might also be interested in – IREDA’s stock climbs 6% to achieve a new all-time high ahead of Q1 results, marking a 364% increase over the past year.
