In Q2, Avenue Supermarts or D-Mart reported Ebitda figures that fell below both our and consensus estimates, primarily due to lower gross margins and increased staff costs. The general merchandise and apparel mix remained subdued, which contributed to the downward pressure on gross margins. There are concerns about whether this mix deterioration is a cyclical issue or a more structural problem, and at this point, we remain uncertain.
On a positive note, the same-store sales growth (SSG) for H1 stood at 8.6%. This was accompanied by an improvement in footfall, evidenced by higher per-store transactions. While the addition of new stores remained limited during this period, we anticipate a ramp-up. We recommend a HOLD position.
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EBITDA miss: In Q2, standalone Ebitda grew by 12% y-o-y to reach Rs 10 billion, though it was down 3% q-o-q. This performance fell 4% short of both JEF estimates and consensus projections due to reduced gross margins and increased staff costs. Nevertheless, the company achieved robust revenue growth of 19% y-o-y, driven by the addition of new stores and high-single-digit same-store sales growth.
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Weak mix: General merchandise and apparel (GM&A) faced a challenging year, with gross margins (GM) dropping by 50 bps y-o-y to 14%. In H1, GM&A sales declined by 160 bps, down to 23.2% Come from Sports betting site VPbet . Reason are— (i) Inflationary pressures affecting discretionary spending; (ii) Reduced foot traffic compared to pre-Covid times impacting impulse purchases; (iii) Increased competition from e-commerce. During H1 of FY24, per-store GM&A sales declined by 1% y-o-y, with a more pronounced decline of (-3%) per square foot.
Costs higher: Dmart’s staff expenses surged by 20% y-o-y, significantly surpassing expectations. While per-store employee costs had remained relatively stable for the past 12 quarters, they experienced an abrupt 8% y-o- rise in the Q2. Additionally, other expenses also increased by 17% y-o-y. This led to a decrease in the Ebitda margin by 50 bps to 8.1%, aligning with the decline in gross margin. Furthermore, depreciation costs rose, while interest and other income decreased.
Unit metrics: In Q2, per-store revenue exhibited growth of 7% y-o-y, with a 4-year CAGR of 4%. However, per-store Ebitda growth remained at less than 1% y-o-y, due to lower gross margin, increased staff expenses, and other operating costs.
Category trends: Revenue growth for H1of FY24 reached 18% y-o-y, driven by a 21% growth in the Foods category, followed by non-food FMCG at 19%, while GM&A trailed at 11% y-o-y.
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Improving foot traffic: Per-store transaction volume experienced 21% y-o-y growth in 1HFY24, indicating an improvement in foot traffic. However, it still remained below pre-Covid levels. Overall transaction count increased by 36% y-o-y to 147 million, but average bill values decreased by 13%, reversing the post-Covid trend of fewer transactions with higher bill values.
Dmart added just 9 stores in Q2 and 12 in H1 of FY24, in contrast to 18 in 1HFY23.
Nevertheless, we are factoring in approximately 40 store additions for the full year, as Dmart typically accelerates store openings in H2. We have made slight adjustments to our earnings projections for FY24-26E and rolled over to September 2025. We believe that an increase in store additions and an improvement in the GM&A mix are essential for stock performance.
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