Stock in Action - Avenue Supermarts 04 October 2024

Highlights

1. DMart Q2 FY25 results show a 14% year-on-year growth, but concerns about slower expansion have emerged.

2. Avenue Supermarts revenue growth has been slower than expected, impacting the stock's performance.

3. DMart stock analysis indicates a divided outlook among brokerages, with mixed responses to its financial results.

4. DMart store expansion risks have been flagged by analysts, who are cautious about future growth prospects.

5. Avenue Supermarts share price forecast varies significantly among analysts, with targets ranging from ₹3,350 to ₹5,769.

6. DMart vs quick commerce competition has become a critical factor affecting the company's future growth trajectory.

7. Brokerage outlook on DMart stock is split, with some optimistic about future performance while others are bearish.

8. Avenue Supermarts Q2 financial performance has raised concerns, particularly with a slowdown in Same Store Sales Growth (SSSG).

9. Long-term investment in DMart remains a consideration for investors, despite short-term challenges in store expansion & margins.

10. DMart stock underperformance in Q2 FY25 may influence investor sentiment, but future growth prospects are still a key focus.

Why Avenue Supermarts Share is in the News?

Avenue Supermarts Ltd., the operator of DMart, has been a key focus in the stock market after releasing its Q2 FY25 results, which showcased a growth in revenue but at a slower-than-expected pace. The company reported a 14% year-on-year (YoY) growth in standalone revenue to ₹14,050 crore for the quarter ended September 2024. This update has led to divided opinions among brokerages, with concerns raised over DMart's store expansion strategy & earnings growth trajectory. These factors have contributed to a mix of optimism & caution around the stock, bringing it into the spotlight.

Avenue Supermarts Q2 Financial Results

For the second quarter of FY25, DMart recorded a 14% YoY rise in standalone revenue, reaching ₹14,050 crore, compared to ₹12,307.72 crore in the same quarter last year. While this represents a significant increase, the growth rate has been slower than anticipated, particularly when compared to the higher growth rates seen in previous quarters. Analysts have pointed out that the pace of growth has moderated, which is partially attributed to a slowdown in Same Store Sales Growth (SSSG) & a slight miss in new store additions during the quarter. Avenue Supermarts operates a total of 377 stores across the country, with six new stores opened during Q2 FY25. The company is aiming to add 45 stores for the full fiscal year.

Dmart’s Management Commentary

In light of the slower-than-expected growth, management has yet to provide detailed reasons behind the moderation in store expansions & revenue growth. However, more clarity is expected during the upcoming Q2 results call, where the management will likely address concerns about growth trends & future expansion plans. The company's medium-term goal of adding 45-60 stores annually remains intact, although challenges related to store additions & potential risks surrounding quick commerce (Q-Commerce) competition have been flagged by analysts.

Brokerage Outlook

Brokerages have offered mixed reactions to DMart's performance in Q2 FY25. 
Morgan Stanley retained an "Overweight" rating with a target price of ₹5,769, highlighting that although revenue growth was slower, operational metrics showed improvement, albeit at a slower rate. The firm is awaiting more details from management on the reasons behind the growth shortfall.  

Macquarie maintained an "Outperform" rating with a target price of ₹5,600, despite noting that store additions were below expectations. The brokerage expects a moderation in gross margins due to product mix changes.

Goldman Sachs held a "Sell" rating with a target price of ₹4,050, citing concerns over the rising competition from quick commerce players & the resulting slowdown in growth. The firm also revised down its FY26 & FY27 EPS estimates by 2%.

Citi also maintained a "Sell" rating with a target price of ₹3,350, expressing caution over the current valuation & the risks surrounding DMart's store expansion plans & product mix.

Long-Term Investor Perspective

For long-term investors, the results from Q2 FY25 should be viewed with a balanced outlook. While the slowdown in revenue growth & store expansions may raise concerns, Avenue Supermarts' strong medium-term growth prospects, with an estimated 20% annual growth over the next three years, still position it favorably in the consumer retailing industry. Furthermore, DMart's superior revenue growth relative to the industry, which is forecasted at around 10% per year, provides confidence in the company's ability to maintain long-term growth.

Investors should also consider the broader industry dynamics, particularly the competitive pressure from quick commerce. While this poses a challenge, DMart's consistent store additions & its strategy to focus on revenue growth over the medium term may provide support for sustained shareholder value.

Conclusion

DMart's Q2 FY25 results have revealed slower-than-expected revenue growth, sparking divided opinions among analysts. While some brokerages remain optimistic about the company's operational metrics & long-term growth potential, others have flagged risks related to competition & store expansion. For long-term investors, the stock's outlook remains positive given its strong revenue growth trajectory & the potential for continued market leadership. However, it is important to stay cautious regarding the near-term challenges that may affect the stock's performance.