DMart: Market not impressed by Q3 earnings as stock closes with marginal gains
The company released its Q3 FY24 (third quarter) numbers on Saturday (January 13), posting a 17.2% YoY growth in its consolidated revenue from operations at ₹13,572 crore, as compared to ₹11,569 crore in the same period last year. This growth was led by a marginal uptick in discretionary spending during the long festive season.
In its earnings release, the company said that festive season sales were lower than expected in the non-FMCG segment, and within FMCG, agri-staples (ex-edible oil) are witnessing high inflation.
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In the general merchandise and apparel (GM&A) segment, the contribution has stabilised and trends have been encouraging post Diwali. However, analysts express concerns about strong competition from organised players such as Reliance, Star-Bazaar, and Zudio affecting GM&A.
Analysts suggest that inflationary pressure and a longer gestation period for large stores impacted DMart’s Q3 performance. Land restrictions and elevated real estate prices further curtailed store expansion, with DMart adding only 5 stores during Q3, bringing the total store count to 341.
In Q3 FY24, EBITDA came in at ₹1,120 crore, compared to ₹965 crore in the corresponding quarter of the previous year, falling short of analyst estimates due to a substantial surge in other expenses.
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The company’s consolidated profit after tax jumped 17% YoY to ₹690 crore in Q3, led by a better product mix and lower interest costs.
Following the company’s Q3 FY24 earnings, domestic brokerage firms have trimmed their forecasts.
Centrum Broking: ‘Add’ rating
The brokerage pointed out that the company’s performance in recent quarters was impacted by lower store addition, lower discretionary spending, and moderating ticket size growth due to a lower contribution from the GM&A segment. Higher contributions from apparel categories lift margins, yet sticky food inflation poses concerns in the short term, it noted.
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With moderating operating performance, the brokerage cut its earnings for FY25 and FY26 by 7.8% and 9.5%, respectively. Therefore, it lowered its rating on the stock to ‘Add’ from the previous ‘Buy’ and cut its target price to ₹4,075 apiece from earlier ₹5,006 apiece.
IIFL Securities: ‘Reduce’ rating
The brokerage maintained its ‘Reduce’ rating on the stock and cut its target price to ₹3,700 apiece. It says that the company’s growth in sales per store has slowed down from 6.5% in 2QFY24 to 5.2% in 3QFY24, and as inflation moderates, there could be further downside risks to this metric.
It forecasts a 21% EPS CAGR over FY24–26, which factors in 10% SSS growth and 50–55 annual store additions (vs. less than 40 likely in FY24).
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“Trading at 76x FY25 EPS and a modest growth outlook, we find the risk-reward unfavourable. However, we do not expect much of a downside in the stock; it is more likely that the stock would time-correct,” said the brokerage.
Antique Stock Broking: ‘Hold’ rating
Antique continues with its ‘Hold’ recommendation on the stock with a target price of ₹4,243 apiece. It points out that key monitorable factors for DMart’s performance will be a recovery in sales of superior margin general merchandise & apparel, a recovery in mature stores/SSSG (%) to pre-Covid-19 levels, and inflationary trends.
Over FY23–26, the brokerage expects DMart to deliver sales, EBITDA and PAT CAGR of 20%, 18%, and 18%.
Kotak Institutional Equities: ‘Sell’ rating
The brokerage also retained its previous rating ‘Sell’ on the stock due to punchy valuations. “We continue to monitor the recovery of the GM&A category, which the company said has stabilised after Diwali. We trim FY2024-26E revenues by 2-3% on lower store addition forecasts (35/55/70 new stores in FY2024/25/26); the lower margin assumption drives a 3-6% EPS cut,” said the brokerage.
It has a target price of ₹3,650 apiece on the stock.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 15 Jan 2024, 04:55 PM IST
