DMart Q2 takeaways: Footfall still low, discretionary demand improving slowly

NEW DELHI: Avenue Supermarts (DMart)'s September quarter numbers suggest that while the demand for the company's FMCG segment has recovered smartly in successive months, it would still take some time before the non-FMCG demand reaches pre-Covid levels.

September was the second straight quarter when the Radhakishan Damani-led company reported a fall in both top and bottom line growth. The pace of year-on-year fall in sales, however, reduced to 11 per cent in September from 33 per cent in June quarter and profit to 38 per cent from 88 per cent in June quarter.

The company opened six new stores during the quarter. Its e-commerce sales were encouraging.

Here are the key takeaways from DMart's Q2 numbers.
Footfall stayed low
The company said footfall at DMart stores have seen a month over month recovery, but they continue to remain significantly lower than pre-Covid levels. This is even as most of its stores operated at pre-Covid operating hours.

Basket values, on the other hand, have been significantly above pre-Covid levels, but have declined month over month.

Overall sales improved, with August numbers being better than July's and September being better than August's, the company said.

Non-essential demand slowly improving
The company said its general merchandise and garments segment saw lesser sales YoY, but noted that the discretionary consumption improved from the June quarter levels.

General merchandise and apparel business contributed 22.7 per cent to the total revenues of the company in September compared with the yearly contribution of 27.3 per cent, thanks to the tightening of discretionary spend by consumers.

The company already could not sell the products for nearly two months of the June quarter. The demand for FMCG and staples segment, meanwhile, recovered smartly as sales for the month of September exceeded a year-ago's sales.

Festive demand complications
The company said, while the FMCG business is trending better on sales as well as supplies, 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 sector," Avenue Supermarts said.

The company feels that the progress of the pandemic and its impact on consumer spending during the festival period will determine its financial performance for the December quarter.

Store openings
DMart said it opened six stores during the quarter. It closed two of its Mumbai stores (one at Mira Road and the other at Kalyan) and converted them into fulfillment centers (FC) for its e-commerce business. The company, however, was quick to note that the two locations had alternate DMart stores within 4 kms.

E-commerce update
The company said it continued to increase its footprint in the Mumbai metropolitan region (MRR), covering additional pin codes. Decision on Mira Road and Kalyan stores, it said, would deepen its online reach and serve customers better in these regions.

"We have also expanded our e-Commerce operations in select pin codes of Pune city," DMart said.

Second ever fall in sales growth
DMart's fall in sales growth for the September quarter was its second ever, at least in its listing history, as per data compiled from AceEquity.

The company had reported a 33 per cent YoY fall in sales in June quarter, as per the corporate database. That said, the company's pace of growth had fallen from 39 per cent in the September quarter of 2018 to 22 per cent by September quarter of 2019. The company reported 24 per cent sales growth each in December and March quarters, before seeing the Covid-led de-growth. Meanwhile, this was the third ever degrowth for DMart in profit terms, as per AceEquity. In December quarter of 2018, the company reported a 1.8 per cent drop in profit.

Analyst Take
Himanshu Nayyar, lead Analyst for Institutional Equities at YES Securities said that Avenue Supermarts' numbers were better than expected led by a quicker normalisation of overall business with a strong sequential recovery. Nayyar said that the gross margins came in line with expectations, given the inferior mix in favour of FMCG and staples while Ebitda margins were impacted due to negative operating leverage.

DMart Ready revenues more than doubled from Rs 42 crore to Rs 88 crore, he noted

"The company increased its footprint to Pune and opened fulfillment centres in Mira Road and Kalyan to increase reach in those markets. Monthly progression business continues to recover month-on-month for the company with lower footfalls getting offset by higher basket values, which continues to normalise at a good pace," the analyst said.

"Risk reward has turned favourable for buying into the stock. After the recent underperformance, the stock is currently trading at 55 times FY22 EPS and 35 times EV/Ebitda. While we have been negative on the stock given the risks to FY21 earnings and medium-term risk of multiple de-rating, the better-than-expected recovery trajectory and the correction in valuation multiples makes us turn more constructive on the stock," the YES Securities analyst said.