India's DMart hits six-month low as margins shrink (updated)

Avenue Supermarts

16/01/2023 05:43

(Adds background, comments from brokerages, updates share
price)
       BENGALURU, Jan 16 (Reuters) - Shares of India's Avenue
Supermarts Ltd  AVEU.NS , which operates the DMart retail chain,
fell to a six-month low on Monday after reporting a contraction
in core quarterly profit margins due to weak discretionary
demand.
    The company said its earnings margin before interest, taxes,
depreciation and amortization fell to 8.34% in the third quarter
from 9.39% a year earlier.
    Multiple brokerages cited weakness in Avenue's general
merchandise and apparel (GM&A) category as consumers still
reeling from the impact of the high cost of living scaled back
spending.
    DMart, known for regular discounts on everything from pulses
to clothes, has seen its discretionary, or non-essential unit
"surprisingly impacted" by high inflation, brokerage Prabhudas
Lilladher said.
    That led to the category's contribution to sales below
pre-COVID levels even as the country rebounded from pandemic
lows, several analysts wrote in their notes.
    GM&A is the highest margin category for Avenue, clocking
over 20%, Centrum Institutional Research estimated.
    "Sales per square feet and gross margins will improve once
the full recovery in GM&A happens," the brokerage wrote in a
note.
    Kotak Institutional Equities analysts said a standalone net
profit of around 6.4 billion rupees ($78.73 million) was 9%
short of the brokerage's estimates even as foods and packaged
goods sales drove a 9.4% increase in consolidated quarterly
profit.
    Still, Avenue could book sales benefits in the long run as
consumers feeling the inflation pinch increasingly prefer
discounted goods, analysts said.
    The current average rating of 26 brokerages on the stock is
"hold," with a median price target of 4,050 rupees, according to
Refinitiv data.
    Avenue's shares, which had in 2022 recorded their first
annual decline, slipped as much as 5.7% to 3,645.20 rupees on
Monday.
    ($1 = 81.2950 Indian rupees)
 (Reporting by Bharath Rajeswaran and Nandan Mandayam in
Bengaluru; Editing by Savio D'Souza and Dhanya Ann Thoppil)
 ((bharath.rajeswaran@thomsonreuters.com; +919769003461))