Avenue Supermarts slips nearly 4% on soft Q1 numbers: UBS, HDFC Securities assign "Sell"

Avenue Supermarts share price: Shares of Avenue Supermarts, which owns and operates the supermarket chain DMart, declined as much as 3.93 per cent to Rs 3,694 apiece on the BSE after the company's June quarter (Q1FY24) numbers disappointed the Street. 

The DMart operator reported on Saturday (July 15) a 2.46 per cent rise in its consolidated net profit at Rs 658.71 crore in the April-June 2023 quarter, as lower sales of apparel and general merchandise impacted margins. The company had posted a net profit of Rs 642.89 crore in the corresponding quarter a year ago, said Avenue Supermarts in a BSE filing.

Its revenue from operations was up 18.20 per cent to Rs 11,865.44 crore during the quarter under review, as against Rs 10,038.07 crore in the same quarter last fiscal.

Avenue Supermarts' total expenses were Rs 11,006.92 crore, up 19.74 per cent in the first quarter of FY24, PTI reported.

The total income of Avenue Supermarts in the June quarter was Rs 11,904.18 crore, up 18.24 per cent.

Avenue Supermarts CEO & Managing Director Neville Noronha said: "Overall gross margins are lower compared to the same period in the previous year, primarily due to lower sales contributions of apparel and general merchandise. However, general merchandise contribution is recovering and trending towards pre-pandemic levels," Noronha added.

Avenue Supermarts stock: What do analysts say?

Global brokerage UBS has maintained a "Sell rating on the stock with a target price of Rs 3,700. The brokerage said that a slow pick-up in discretionary spending and a weak product mix continue to impact gross margin.

HDFC Securities, too, is bearish on the stock. The domestic brokerage has assigned a "Sell rating with a target price of Rs 3,200. In its review report, the brokerage said, "DMART’s margin pressures are likely to remain over the short term as more alternatives (especially in value fashion) have kept apparel sales low. We reduce our EPS estimates (-5.1/-2.8/-2.8% for FY24/25/26, respectively) to account for that and maintain our SELL rating on DMART, with a DCF-based TP of Rs 3,200/share, implying 55x Sep-25 P/E (consolidated)."

On the other hand, JM Financial has maintained a "BUY" rating on the stock with a target price of Rs 4,255.

The brokerage added that DMart’s June quarter report was not too different from those seen in recent quarters. "Growth in sales per store, though a tad better compared to the last few quarters, is still not good enough given the business’ true potential, in our view. Discretionary sales remained an issue and continued to impact both throughput (and, therefore, operating leverage) and also gross margin."

Management commentaries, interestingly, point to a silver lining in this regard. As per the company, "general merchandise contribution is recovering and trending towards pre-pandemic levels," but the apparel category still seems to need some work. A recovery in this part of the portfolio would help gross margin and also bring scale efficiencies back into the business.

"We believe it’s more a question of when and not if. We continue to like DMart; businesses with such long growth runways are rare, and we recommend investors not get too carried away by short-term weakness(es)," analysts at JM Financial said in a Q1 review report.