Covid 2.0 to hurt DMart, may cancel out Q4 recovery

ET Intelligence Group: Avenue Supermarts’ strong recovery in the March quarter may lose momentum in the near term due to the second wave of Covid. After losing significant revenue in the first half of FY21, the company ended the fiscal with a 3 per cent revenue de-growth and 15.5 per cent earnings decline.

Growth in FY22 is also likely to see a hit. Despite this, the stock is up 20 per cent in the past year and trades at an expensive valuation of 175 times trailing earnings.

Given the near term challenges and uncertainty, the stock may underperform in the short-to-medium term.

“Significant disruptions have been seen from March 2021 onward. More than 80 per cent of our stores are operating for a significantly lower number of hours (not exceeding four hours per day) or are even shut for operations for one to weeks or shut on weekends. These shutdowns are having an adverse and severe impact on our revenues,” said Neville Noronha, CEO of the company.
For the March quarter, the retailer reported steady revenue growth of 18.5 per cent year on year to Rs 7,412 crore. Same-store sales growth for two years and older stores was at 6 per cent for the first two months of the quarter but that declined 10 per cent in the first half of March due to partial lockdown.

Sales for the second fortnight appeared higher due to a lower base of last year (the beginning of the pandemic in India). A higher share of general merchandising in the quarter and controlled operational costs helped improve margins, thus resulting in Ebitda growth of 47.6 per cent to Rs 612.7 crore. Net profit grew 53 per cent to Rs 414 crore.
The company continued to expand its recent e-commerce business in the Mumbai Metro region and also commenced it in four new cities including Pune, Ahmedabad, Bengaluru and Hyderabad. Although this shows the confidence of the conservative management in the model, it currently remains very small to make meaningful contributions to the overall financials.

The company accelerated the store additions in the quarter adding 13 stores (22 stores in FY21). The total store count stood at 234 stores.

Capital work in progress stood at Rs 1,020 crore against Rs 364 crore which means a stronger store addition pipeline but the new restrictions may slow down the construction activity.

The company had a healthy balance sheet with cash and equivalents of around Rs 2,600 crore. A strong business model and a strong balance sheet will keep the long-term story intact, but the near-term challenges and uncertainties remain.