DMart’s net profit in the first quarter of fiscal 22 rose 130%, but investors are not enthusiastic. here’s why

Avenue Supermarts Ltd, which manages the DMart chain of stores, announced its results for the June quarter (T1FY22) on Saturday. Gross margins for the quarter were a sore point, contracting 129 basis points year on year to 12.4%. A basis point is one hundredth of a percentage point.

“DMart surprised negatively with a low gross margin over 22 quarters,” analysts at Jefferies India Pvt said. Ltd in a report published on July 10.

This is striking given that the June 2020 quarter was more affected due to the lockdown from the covid-19 pandemic, as restrictions were comparatively tighter last year. The gross margin for the June quarter is also lower than the March quarter, declining by about 200 basis points.

Commenting on the gross margin performance, analysts at JM Financial Institutional Securities Ltd said, “We believe the debate over increased competitive intensity in the grocery industry (especially given the increased aggressiveness de Jiomart over the past year) could eventually take center stage again, until this is somehow settled. The broker added, “Our view, however, is that DMart’s prices are mostly matched, and there is no race to outdo each other just yet. “

Overall, while the company’s net profit for the June quarter more than doubled year-over-year to 115 crore rupees, lower gross margins meant profits were below average. expectations. “(It was) a 24% shortfall on our estimate. The two-year CAGR was strongly negative (-40%),” analysts at Jefferies said. CAGR is short for compound annual growth rate.

Nevertheless, DMart performed well on the EBITDA front (earnings before interest, taxes, depreciation and amortization). The EBITDA margin for the June quarter increased 156 basis points from the same period last year to 4.4%. Of course, operating margins had declined significantly in the June quarter of last year and as such the basis was favorable this time around. Additionally, DMart’s other expenses were down 9% year-on-year, which helped. Nonetheless, it should be noted that the EBITDA margin for the June quarter was well below the 8.4% in the March quarter.

Granted, DMart’s revenue grew sharply by 31% year-on-year, to Rs5032 crore, although helped by a favorable base. Note that the company’s revenue was Rs5781 crore in the June 2019 quarter. “During these multiple blocking periods, we have realized that a store needs at least 45 days of uptime. unimpeded to return to pre-Covid sales momentum, “DMart said while announcing its results.

Meanwhile, the company added four stores during the quarter and has 238 stores as of June 30.

DMart stock is trading at 88 times estimated earnings for fiscal 2023, based on data from Bloomberg. High valuations are likely to limit significant increases in the near future. And there are risks ahead, such as the possibility of growth moderating due to increased competition from deep-pocketed Amazon and Reliance Retail. On the positive side, the stock benefits from a scarcity premium, which provides a cushion for valuations to that extent. In the future, better performance of DMart’s e-commerce operations may serve as a trigger.

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