Avenue Supermarts shares fall 4% on weak Q1; what should investors do?

Shares of Avenue Supermarts dropped as much as 4% in early trade on Monday after the operator of DMart retail chain reported lower than expected earnings in the April-June quarter of the current fiscal. The share price of Radhakishan Damani-led firm has fallen after rising 1.2% in the past two sessions.

Snapping two sessions gaining streak, Avenue Supermarts shares opened lower at ₹3,802, down 1% against Friday’s previous closing price of ₹3,845.50 on the BSE. In the first two hours of trade so far, the largecap stock declined as much as 3.9% to ₹3,694, with 0.4 lakh shares changing hands over the counter compared to two-week average volume of 0.47 lakh stocks. The market capitalisation of the Mumbai-headquartered firm dropped to ₹2.44 lakh crore.

The stock is down 20% from its 52-week high of ₹4,606 touched on September 2, 2022, while it has risen 12% from its 52-week low of ₹3,292.65 hit on March 16, 2023.

Avenue Supermarts has under BSE benchmark Sensex in the last one year after outperforming in the last three and five years. The stock has delivered 23.7% and 19.6% returns in the last 3 year and 5 year period, respectively, compared with 22% and 12.8% rise in the Sensex during the same period. In the last one year, the counter has given a negative return of 3.4%, while it shed 7.1% in the calendar year 2023. In contrast, the Sensex gained 23.2% in one year and 8.8% on year-to-date (YTD) basis.

For the quarter ended June 30, 2023, the DMart operator reported a 2% rise in consolidated net profit to ₹659 crore as against ₹642.89 crore in the year-ago period. Sequentially, the consolidated profit grew 43% from ₹460.10 crore in the previous quarter.

The consolidated revenue from operations grew 18.2% year-on-year (YoY) and 12% QoQ to ₹11,865.44 crore during the quarter under review.

On the operating front, Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) was at ₹1,035 crore, as compared to ₹1,008 crore in the corresponding quarter of last year. EBITDA margin dropped to 8.7% in Q1FY24 as compared to 10% in Q1FY23.

“Our revenue grew by 18% in this quarter over the corresponding quarter of last year. Overall gross margins are lower compared to the same period in the previous year, primarily due to lower sales contribution of apparel and general merchandise. However, general merchandise contribution is recovering and trending towards pre-pandemic levels. We opened 3 new stores during the quarter. Our total stores now stand at 327,” says Neville Noronha, CEO & Managing Director.

What should you do with Avenue Supermarts stocks?

As many as 8 analysts have offered long term price targets at an average of ₹3,974.57 per share for Avenue Supermart. The consensus estimate represents an upside potential of 5.85% from the current market price, according to market research platform Trendlyne.

ICICI Securities has maintained ‘Hold’ rating on Avenue Supermart with a revised target price of ₹3,700 from ₹3,800 estimated earlier. The agency said that the Q1FY24 result was below consensus expectations, which was not a surprise, as under-recovery in general merchandise and apparel (still below pre-pandemic levels) continues to be a drag on gross margins. The higher-than-expected competitive intensity in food and non-food segments and slower turnaround of e-commerce operations remain key downward risks for the company.

Prabhudas Lilladher has recommended a long term ‘Buy’ rating for the stock but cut the price target to ₹4,587 for FY24 and FY25 from ₹4,651 earlier, saying that DMart needs to restructure its apparel business given new threat perception, which will take a few quarters for turnaround. “We cut EPS estimates of DMart by 3%/1.5% for FY24/25 and target price to ₹4,587 (₹4,651 earlier) following disappointing margin performance led by deterioration in sales mix given lower sales in General merchandise and apparel; and structural competitive pressures from mass market apparel players (Zudio, Reliance Trends),” it says.

JM Financial has also assigned a ‘Buy’ rating to Avenue Supermart with an unchanged price target of ₹4,255 for 12-month period. “DMart’s Jun-Q report was not too different from those seen in recent quarters. Growth in sales per-store, though a tad better vs 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,” the agency says in a report. “We continue to like DMart - businesses with such long growth runways are rare and we recommend investors to not get too carried away by short-term weakness,” it says.

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