Footfalls at DMart stores, though nowhere near pre-Covid levels, improved, and the pace of fall in sales growth slowed down.
The company’s focus on e-commerce also earned appreciation, but a rerating on the stock looks unlikely in the near future, after the chain of retail stores warned of supply-side challenges in the non-FMCG segment ahead of the festive season.
Analysts said one can wait for a better entry point to enter the stock.
The scrip has 10 ‘underperform’ (six) and ‘sell’ (four) calls against seven ‘buy’ (two) and outperform (five) calls. Seven brokerages have a ‘hold’ rating on the stock, suggests data publicly available with Reuters.
The company reported a 38.39 per cent fall in consolidated net profit at Rs 199 crore in September quarter compared with Rs 323 crore in the same quarter of last year. The consolidated total revenue for the quarter declined 11.43 per cent YoY to Rs 5,306 crore from Rs 5,991 crore in the year-ago quarter.
Gross margins for the quarter declined 102 basis points YoY to 14 per cent due to inferior revenue mix i.e. low contribution from general merchandise and garments segment.
The core food and staples segment accounts for nearly 77 per cent of sales. The rest is contributed by the non-essential segment.
The company said its business has recovered to 88 per cent of pre-Covid levels in the September quarter. Demand for FMCG and staples remained robust, the company said, noting that the September sales of all stores exceeded September 2019 sales for FMCG and staples. That said, sales of general merchandise and garments category continues to struggle with revenue contribution staying at 23 per cent compared with 27 per cent in FY20.
During the quarter, the company added 6 stores while converting two up-and-running stores into fulfillment centers. Store addition for the quarter stood at 42,000 square feet in size compared with 75,000 square feet addition in June quarter.
What the management said
CEO & MD Neville Noronha said the company’s business has seen some improvement and it continues to gradually progress towards pre-pandemic levels.
“Month-on-month sales have improved during this quarter. August was better than July, and September was better than August. The highlight being that footfalls continue to be significantly lower than pre-Covid levels, but basket values are significantly higher than pre-Covid levels,” Noronha said.
Noronha said his company could not sell garment category products for nearly 2 months of the June quarter due to regulatory restrictions. Once permitted, it saw insignificant sales due to tightening of discretionary spend by consumers.
“Almost all of the shopping in the June quarter was need-based and essential in nature. In light of that, September sales contribution from general merchandise and apparel is encouraging,” Noronha said.
Noronha said that large suppliers and FMCG businesses are trending better on sales as well as supplies, but supply chains and manufacturing in the non-FMCG sector will take some time to get back to pre-Covid levels.
“Longer lead times, a slower response to immediate demand and the biggest festivals so close on the anvil would be more complicated for the non-FMCG SME sector,” he said.
What analysts say
JM Financial said the recovery in general merchandise & apparels — that earns much higher gross margin — was lower than its expectations.
“The latter impacted not only revenue but also profitability, driving gross profit margin lower. We expect sentiment on the stock to stay subdued on the back of this result. The stock is down 13 per cent since our mid-April downgrade, and can start to look more interesting soon, in our view,” it said.
HDFC Institutional Equities said that D-Mart remains well-capitalised and best placed within a peer set to carve out recovery. While recent price correction from its peak certainly made valuations more palatable, the brokerage felt that it would continue to wait for even better entry points.
Ambit Capital said that the improving aggression on e-commerce is visible, with launch of fulfilment centres in Mira Road and Kalyan and extension of e-commerce in Pune. It remained positive on “DMart’s excellence on troika of sourcing, logistics and assortments,” but sought better entry points in light of near-term sales recovery and margin challenges.
ICICI Securities stayed positive on DMart even as it believed the near-term headwinds may have a negative impact on DMart performance in FY21.
“Over the years, D-Mart has proven to be a resilient business model generating superior RoIC of 23 per cent and healthy fixed asset turnover ratio of 4.1 times,” it said.
Competition & store expansion
For the quarter, the company opened six new stores and shut two in Mira Road and Kalyan in Mumbai. Kotak Securities expects the bulk of the company’s store expansion to happen in the second half of FY21. For now, it is retaining its assumption of 24 new stores in FY2021.
Ambit said that cash burns from existing and new players may impact DMart’s valuations and margin levers arising from the rising share of discretionary products may also stay a bit soft.
In a report last month, Kotak had suggested that JioMart, BigBasket, Grofers and Amazon Fresh were giving tough competition to the company. Among 31 products, the brokerage tracked, DMart was the lowest priced retailer for only seven of 31 products. This was against 14 out of 31 products in March.
Motilal Oswal is valuing DMart at a 35 per cent discount to the three-year average EV/Ebitda multiple of 65 times at Rs 2,000. HDFC Institutional Equities has a ‘Reduce’ rating on DMart with a target of Rs 1,850, based on 33.5 times September FY22 EV/EBitda for standalone business and factoring in 2 times sales for e-commerce business.
ICICI has cut its target to Rs 2,300 from Rs 2,360, valuing the firm at 38 times FY23 EV/EBitda. IDBI Capital has a target of Rs 2,471 on the stock based on 40 times FY23 EV/Ebitda.