For a stock that trades at an exorbitant multiple of 140 times trailing twelve month earnings, Avenue Supermarts Ltd’s September quarter results are discouraging. Avenue runs the DMart chain of retail stores.

True, the company’s last quarter results show a reasonable recovery compared to the June quarter results, which were impacted by the strict covid-19 lockdown and saw revenues drop by nearly 34% year-on-year. This time around, with further easing of the lockdown restrictions, the revenue drop is contained to 12%. 

                                     

JM Financial Institutional Securities Ltd analysts said in a report on 17 October, “DMart’s September quarter operating performance was a negative surprise to us, especially since total revenue had already recovered to about 80% of base level by the month of Jun; to that extent, a 11-12% yoy decline for full Sep-Q was much steeper than what we envisaged."

Credit Suisse Securities (India) Pvt Ltd analysts said, “The 12% decline in revenues includes retail space increase of about 25% year-on-year."

The company maintains that there has been a month-on-month improvement in sales with August being better than July and September being better than August. In the month of September, two years and older DMart stores did 87.5% of September 2019 sales.

Even so, not everyone is impressed with this recovery. “As we had feared while downgrading the stock in mid- April, post-pandemic social distancing norms are likely taking a toll on crowd at stores, which was one key factor that drove the high throughputs one saw for DMart," pointed out JM Financial.

DMart’s earnings before interest, tax, depreciation and amortisation (Ebitda) margin had declined sharply by 750 basis points year-on-year in the June quarter to 2.8%. One basis point is one hundredth of a percentage point. Accordingly, the measure was expected to pick up from the lows. For the September quarter, Ebitda margin contracted by 244 basis points to 6.2%.

Even so, the sequential recovery in Ebitda margin isn’t particularly striking. With revenues declining, operating leverage wasn’t favourable. Plus, product mix was weaker. The contribution of sales of General Merchandise and Apparel was lower comparatively at 22.7% of revenue. Note that the same measure was higher at 27% for FY20. Typically, margins for this segment are higher for DMart.

The company added 6 stores during the quarter while 2 stores were closed and converted into fulfilment centres for e-commerce business. After Mumbai, DMart has expanded its online segment into select pin codes of the Pune market. Analysts view this development positively considering that competition is rising competition in the online space.

Shares of Avenue Supermarts were trading about 1% higher in earlier deals on Monday on NSE. However, the stock is more than 20% away from its pre-Covid highs seen in February. Despite this sharp correction, as mentioned earlier, valuations of the Avenue stock are pricey.