ICICI Securities Cuts Avenue Supermarts Rating, Sets Target Price at ₹4100

ICICI Securities has downgraded Avenue Supermarts to a “Reduce” rating, lowering the target price to ₹4100, as stated in its report on October 14, 2024.

Sales Growth Slows Due to Quick Commerce

Avenue Supermarts saw its revenue, gross profit, EBITDA, and net profit grow by 14%, 16%, 10%, and 8% year-on-year, respectively. However, the 14% revenue growth was lower than the company’s usual rate of over 17% in recent quarters. This is the slowest growth for a single quarter, excluding the pandemic period. The slower growth is mainly due to competition from online grocery services in major metro cities, where DMart stores typically generate high sales per square foot. Foot traffic (number of bills) dropped by 1% compared to the previous quarter, largely due to the rise of quick commerce services. It seems that more customers are choosing convenience over value shopping at DMart.

The company increased its retail space by 14% year-on-year, reaching 15.8 million square feet, consistent with recent trends. However, sales per square foot remained mostly flat. Among product categories, the non-food segment grew by 12%, underperforming compared to food and general merchandise & apparel, which grew by 15%. DMart’s online platform, DMart Ready, saw a 21% revenue increase in the first half of FY25, but this is still lower than the growth of quick commerce competitors. DMart Ready is now available in 24 cities.

Operating Margins Under Pressure

Gross margins improved slightly by 0.2% year-on-year, reaching 14.2%, thanks to higher sales in general merchandise and apparel. However, the EBITDA margin dropped by 0.3% to 7.9%, mainly due to increased operating costs. The net profit margin also fell by 0.3% to 5.1%, though the company’s long-term target is 5-6%. For comparison, the average net profit margin was 4.7% from FY17 to FY19.

Valuation and Risks

ICICI Securities has lowered its earnings estimates for Avenue Supermarts by 14% for FY25 and 17% for FY26 due to slower revenue growth and pressure on operating margins, driven by the rise of quick commerce. They now expect revenue, EBITDA, and net profit to grow by 17%, 16%, and 15% from FY24 to FY26. The stock rating has been downgraded from “Add” to “Reduce,” with a new target price of ₹4100, down from ₹5400.

Upside risks include a significant recovery in general merchandise and apparel sales or reduced competition from quick commerce. However, a downside risk would be slower-than-expected expansion of retail space.