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DMart: “Aajao, Dikhadunga” 🛒

Apart from becoming a part of the real estate meme-verse of India, Avenue Supermarts, or DMart has been the talk of the town for aeons for its “never bet against it” title.


Full parking spaces, rubbing shoulders with other shoppers in tiny aisles, and getting daunted by long queues may be a dampening shopping experience - but if the price is right, DMart fanatics will rush to grab those discounts!


But, with the stock down almost 30% in the past year and a half, the question arises - has the discount gone too far and is this price right?


What’s Wrong with DMart?

On the face of it, it looks like nothing is wrong with DMart. In FY23, its revenue grew by 38% YoY and PAT grew by 59%. But a deeper dig into the numbers highlight enough reasons to explain why the stock has been such an under-performer.


1. Store Additions


The simplest way to gauge growth of a company like this - check how many stores they’ve been adding, and on this front, there has been a question raised on DMart’s prowess.


Naturally, the pandemic affected the offline retail business dramatically. In FY20 DMart had added 40 stores, and that almost halved to just 22 stores in FY21. From there, it did make a bit of a recovery with 50 new stores in FY22. But with the number dropping again to 40 additions in FY23, the recovery in store additions has been looked at as patchy.



But what’s got investors sweating is the fact that compared to Reliance Retail, these numbers look nothing but petty. While DMart had a total of 324 stores as of March 2023, Reliance Retail was at a mammoth 3,300. And it’s not just about how many more stores Reliance has, but about how fast it’s growing. In the March 2023 quarter, Reliance Retail added 966 stores, which is almost 3x of the total stores that DMart has.


Competition growing bigger and faster has been leading to a natural worry that DMart’s growth factors will start getting affected.


2. Revenue Per Square Foot

The next step in ascertaining if the company has grown is how much more revenue is it making with all the new space it has taken up - what is the point otherwise?


Pre-pandemic, in FY19, DMart had a revenue per square foot of Rs. 34,647; which declined to Rs. 27,545 in FY22 - but why?


  • DMart’s clientele is a price conscious one. Inflation resulted in household budget cuts which inhibited big purchases

  • Additionally, there has been a change in strategy for DMart with it focusing on increasing the size of its stores. Earlier DMart stores were between 35,000-40,000 square feet. However, as of now, of the 324 stores, around 60% are more than 45,000-50,000 square feet in size


These two factors resulted in a drop in the revenue per square foot, which implies deterioration in the quality of growth.


3. Revenue Mix

DMart has three segments - Food, Non-Food, and General Merchandise & Apparel. Of these three, General Merchandise & Apparel has the highest margin, at 25-28%; whereas, Groceries fetch the lowest margin at 10-12%.


Lately, the higher margin segment of General Merchandise & Apparel has been seeing slower growth for DMart, thanks to the inflation-affected consumer, and stiff competition.


Competition has been intensifying in the price segment that DMart caters to, with players like Zudio, Max and Reliance Retail not just growing larger, but also offering lower prices and better customer experience.







The change in revenue mix, away from General Merchandise & Apparel has been reflecting in DMart’s margins.


Overall, profitability hasn’t been the name of the game for DMart:

  • In 4QFY23, while revenue growth was at 20% YoY, EBITDA growth came in at a mere 5%. To add some context, that 5% has been the slowest EBITDA growth since listing, and was even lower than street expectations, which already seemed conservative

  • In 4QFY23, EBITDA margins were at 7.3%, compared to 8.4% a year ago. In addition to this, EBITDA per store was at Rs. 2.5 crore, versus Rs. 2.7 crore a year ago. Gross margin compression, lower revenue per square foot because of increase store size, and a changing revenue mix have all resulted in the dismal profitability

So while the overall FY23 numbers look good, quarterly earnings, and the underlying trends don’t seem too bright at this point.


Wait, Not All is Bad at DMart!

  • There is an important metric in retail called the Same Store Sales Growth, which basically measures the growth in revenue from store locations that have been in operation for at least one year.

  • For DMart, 72% of stores are ones that have been operational for at least a year, and they grew by 11% in 2HFY23!

  • The strong growth indicates that old stores are showing healthy growth, and that the problem is in fact in new additions

Now why are we calling this a silver lining? Remember how DMart is adding new stores that are larger? The fundamental reality of any business is that setting up requires an initial investment, which fructifies and pays off over time.


Hence, while setting up these newer and larger stores might result in a dip in unit financials and profitability at the beginning, as footfall increases, more shelves get full and higher conversions take place!


This is likely to lead to better revenue per square foot, higher EBITDA per store, and better performance on overall revenue growth, margins and even return ratios.


Take revenue per square foot for example. It dropped from Rs. 34,647 in FY19 to Rs. 27,545 in FY22. However, in FY23, it inched up and rose to Rs. 31,096. To reach pre-pandemic levels, it could take a few quarters.

Additionally, easing inflation is a big sign of respite for DMart. Given its price sensitive consumer base, any fall in inflation is expected to result in:

  • higher spending by consumers,

  • better ability for DMart to price its products, and not be pressured by offers and discounts to keep sales going, and

  • consumers looking beyond the absolute necessary, and increasing discretionary spending on the high-margin General Merchandise & Apparel segment

With these factors, it is expected that challenges would be short-lived in nature, and improvement will start reflecting in financial performance towards the end of 2023!


“But wait, there’s more!”

  • DMart owns its stores and doesn’t lease them giving it the advantage of lower recurring costs, higher margins, and even the ability to weather challenging macroeconomic conditions

  • It has minimal debt on its books, making it a strong cash flow business without leverage

  • It has been prudent on store additions, balancing the focus on profitability instead of rampant expansion

  • Its focus on turning inventory helps it generate higher revenue, profits and returns on each of its stores

But while the business is good, a stock being good or bad depends on what price you’re getting it at. And so far, thanks to its performance and fan following, it traded at expensive valuations.

While stocks with a long-term growth story and strong fundamentals are worth not letting go off, high valuations make it difficult to have a ‘buy at any price’ attitude.


However, the 30% fall has given the stock breathing space, and cleared some of the froth on valuations, giving investors an opportunity to accumulate a robust long-term story! Guess the company’s share is also at a discount for you to lap up if you concur with the story like we do!



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