The company that owns and operates the DMart supermarket chain saw a 47 basis points (bps) year-on-year increase in its Q3 standalone Ebitda margin to 8.4%—a multi-quarter high. This is the first year-on-year increase in Ebitda margin after it had dropped for six straight quarters.
The margin expansion can be attributed to the 50 bps rise in gross margin to 14.5% and a slower rate of growth in other operating expenses. Also, there may have been some benefit due to lower discounting after the cuts in the goods and services tax (GST) rates.
Factoring in the better margins, some analysts have raised their earnings estimates. But investors aren’t too thrilled, with the stock rising just 0.8% on Monday.
Margins stole the limelight at Avenue Supermarts Ltd on Saturday, when the retailer announced its earnings for the December quarter.
The company that owns and operates the DMart supermarket chain saw a 47 basis points (bps) year-on-year increase in its Q3 standalone Ebitda margin to 8.4%—a multi-quarter high. This is the first year-on-year increase in Ebitda margin after it had dropped for six straight quarters.
The margin expansion can be attributed to the 50 bps rise in gross margin to 14.5% and a slower rate of growth in other operating expenses. Also, there may have been some benefit due to lower discounting after the cuts in the goods and services tax (GST) rates.
Factoring in the better margins, some analysts have raised their earnings estimates. But investors aren’t too thrilled, with the stock rising just 0.8% on Monday.
One worry is whether the high margin can sustain for long, given the intense competition from quick commerce companies, and operating cost pressures. Staff costs remain elevated, jumping 32% year-on-year in Q3 to ₹350 crore, which could perhaps be attributed to spending on improving service levels in stores, as highlighted by the management in the past.
Margins stole the limelight at Avenue Supermarts Ltd on Saturday, when the retailer announced its earnings for the December quarter.
The company that owns and operates the DMart supermarket chain saw a 47 basis points (bps) year-on-year increase in its Q3 standalone Ebitda margin to 8.4%—a multi-quarter high. This is the first year-on-year increase in Ebitda margin after it had dropped for six straight quarters.
The margin expansion can be attributed to the 50 bps rise in gross margin to 14.5% and a slower rate of growth in other operating expenses. Also, there may have been some benefit due to lower discounting after the cuts in the goods and services tax (GST) rates.
Factoring in the better margins, some analysts have raised their earnings estimates. But investors aren’t too thrilled, with the stock rising just 0.8% on Monday.
One worry is whether the high margin can sustain for long, given the intense competition from quick commerce companies, and operating cost pressures. Staff costs remain elevated, jumping 32% year-on-year in Q3 to ₹350 crore, which could perhaps be attributed to spending on improving service levels in stores, as highlighted by the management in the past.
Avenue’s sales mix remained broadly stable, with the share of the lower-margin food category in revenue at 57.19% for the nine-month period ended December; non-foods (FMCG), and general merchandise & apparel shares stood at 19.83% and 22.98%, respectively.
“The continued tilt towards low-margin foods caps structural margin expansion,” wrote ICICI Securities analysts in a 12 January report, adding, “Q3 margin improvement appears execution and seasonality led, rather than indicative of a structural shift in mix or pricing power.”
Sore spot
For Avenue, revenue growth continues to be a sore spot, moderating to 13% in Q3, the slowest growth rate seen in the past ten quarters at least. Despite festive season footfall, like-for-like growth dropped to 5.6% from 6.8% in Q2 and 8.3% in Q3FY25. Like-for-like growth for Avenue refers to growth from sales of same stores that have been operational for at least 24 months at the end of each period.
Revenue growth was partially impacted due to deflation in staples, said Anshul Asawa, CEO-designate of the company. Asawa will be appointed CEO from 1 February and managing director from 1 April.
“Given the strong operational beat in Q3 our FY26 earnings per share (EPS) estimates go up by 3%; however, our FY27 estimates are largely unchanged,” said JM Financial Institutional Securities Ltd. It has cut FY28 estimates by 3% largely on account of a lower store opening estimates amid a slower-than-expected ramp-up in store openings and a cut in like-for-like growth estimates.
Avenue opened 10 stores in Q3, taking the total count to 442 as on 31 December. Meanwhile, it is evaluating the full impact of the new labour codes, effective 21 November. It has estimated and accounted for incremental liability for its own employees, which is not material, and is also evaluating other possible impacts, including for the contract workforce. The overall impact is unlikely to be material, according to the management.
Decelerating revenue growth momentum has meant Avenue’s shares have risen just about 4% in the past year, even though valuations are pricey. The stock trades at around 69 times FY27 estimated earnings, as per Bloomberg consensus.
“A meaningful re-rating would require a sustained recovery in discretionary-led life-for-like growth and store-level productivity, rather than further margin support alone,” pointed out ICICI Securities. Near-term growth prospects appear dull amid intense competition from quick commerce firms.
