Avenue Supermarts (DMart) Stock Analysis | Why the Stock is rising?

Avenue Supermarts Ltd – Q3 FY2019-20 Results Analysis

Introduction

Avenue Supermarts, the operator of supermarket chain of D’Mart reported a healthy 56% growth in its consolidated net profits in Q3 FY20. The growth was mainly driven by lower tax and higher operating income. Lets analyze Avenue Supermarts quarterly results update in detail in this article.

Avenue Supermarts Ltd – Q3 FY20 Results Analysis

Avenue Supermarts primarily engaged in the business of organized retail and operates supermarkets under the brand name of D-Mart. D-Mart seeks to be a one-stop shopping destination for the entire family, meeting all their daily household needs.

Q3 FY2019-20 Financial Highlights

• D-Mart reported strong sales growth of 24.4% YoY to Rs.6,809, driven by healthy store addition pace in Q3 FY20.
• While the net profit increased by almost 56% YoY to Rs.384 Cr. Lower tax rates (22% vs 36%) boosted the PAT growth to 56% in spite of 27% PBT growth in Q3 FY20.
• As per the management, sales growth is improved because of a favourable product mix, improved gross margins.
• The stock price has appreciated around 13.5% since the announcement of the recent corporate tax rate cut. Because the benefit of higher free cash flows probably can be passed on through price cuts to consumers to boost revenue growth in coming quarters.

Q3 FY2019-20 Operating Profit Margin %

• Operating expenses for Q3 FY20 have grown 24% YoY to Rs.6,325 Cr, with 13.3% QoQ growth.
• It restricted company’s profitability to boost in Q3 FY20 even at a faster pace.
• Operating profit margin % has improved to 8.8% in Q3 FY20 from 8.2% in same quarter last year, Q3 FY19 and from 8.7% in last quarter Q2 FY20.
• It indicates the improvement in the operating efficiency of the company YoY as well as QoQ.
• The gross margin expansion is mainly driven by change in product mix and pricing renegotiation with vendors.

Advantage of Need-based Consumption Business Model to Sustain Growth Trajectory

• Retail sector is basically a need-based sector. If any business is dependent on the need-based consumption, then the economic slowdown won’t affect much to the earnings growth of that business. So, in this case such business won’t find it much difficult to achieve a steady growth graph (economic growth + inflation growth).
• And due to strong earnings visibility, the stocks like Avenue Supermarts, Reliance Industries (due to Reliance Jio + reliance Retail) are trading at a premium valuation.
• These stocks are having a great advantage of need-based consumption business model to sustain growth trajectory.
• D-Mart’s robust execution on core retail operating parameters in an environment of consumption slowdown is quite impressive. It demonstrates the superiority of its business model.

Conclusion

• Currently, Avenue Supermarts is tackling only the Tier-1 and Tier-2 cities. And according to its market study, the company may enter in the online retail business also in near future.
• Also, with the help of efficient supply chain management strategies employing, Avenue Supermarts is planning to open Mini D-Mart stores like small kirana stores to improve their presence and penetrate the unrealised market also.