Avenue Supermarts (DMart)

ON AN EXPANSION ROLL 

DMart follows an everyday low pricing model instead of offering discounts or promotions. This approach has helped it build customer trust and loyalty, evidence of which lies in its rapid expansion through an increasing number of stores across more locations. 

DMart is a one-stop supermarket chain that aims to offer customers a wide range of basic home and personal products under one roof. Each DMart store stocks home utility products, including food, toiletries, beauty products, garments, kitchenware, bed and bath linen, home appliances and more, available at competitive prices that its customers appreciate. The core objective is to offer customers good products at great value. DMart was started by Radhakishan Damani and his family to address the growing needs of the Indian family. 

From the launch of its first store in Powai in 2002, DMart today has a well-established presence in 375 locations across Maharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh, Karnataka, Telangana, Chhattisgarh, NCR, Tamil Nadu, Punjab and Rajasthan. The supermarket chain of DMart stores is owned and operated by Avenue Supermarts Limited (ASL). The company has its headquarters in Mumbai. 

DMart owns most of its stores, eliminating rental expenses that eat into profits. This allows the company to maintain low prices. It strategically locates stores in suburban areas with lower rents. Owning the real estate provides cost advantages. DMart enters into long-term lease agreements for the stores it does not own. This provides stability and control over occupancy costs. DMart operates on a unique ownership model that significantly contributes to its success. As of March 2024, ASL had 365 hypermarket stores across 13 states and one union territory 

Strategic Operations
Here’s an overview of some key strategic practices that have contributed to DMart’s success:
■ Everyday Low Pricing (EDLP): DMart follows an EDLP strategy, offering consistently low prices rather than frequent discounts or promotions. This approach helps build customer trust and loyalty. 
■ Limited SKU Model: The company stocks a carefully curated selection of products, focusing on fast-moving consumer goods (FMCG) and daily household items. This strategy helps optimise inventory management and reduce costs.
■ Ownership Model: DMart primarily operates through an ownership model rather than leasing store spaces. This approach gives them more control over their locations and helps reduce long-term operational costs.
■ Cluster-Based Expansion: The company expands by focusing on specific geographic clusters, which allows for efficient supply chain management and brand recognition within those areas.
■ Store Design: DMart stores have a simple, functional layout that prioritises efficiency over aesthetics. This helps keep operational costs low and supports their low-price strategy. n Private Labels: The company offers its own private label products in various categories, which typically provide higher profit margins compared to branded products.
■ Cash and Carry Model: DMart encourages bulk purchases by offering additional discounts on larger quantities, appealing to both individual consumers and small businesses.
■ Limited Marketing: The company relies more on word-of-mouth and its reputation for low prices rather than extensive advertising campaigns, helping to keep costs down. n Efficient Supply Chain: DMart has developed a robust supply chain network, often dealing directly with manufacturers to cut out middlemen and reduce costs.
■ Conservative Financial Management: The company maintains a strong balance-sheet with low debt, which provides financial stability and flexibility for expansion. 

These strategic practices have helped DMart establish itself as a leading value retailer in India, known for offering quality products at competitive prices. 

Business Segments
Avenue Supermarts Limited (DMart) operates through three primary business segments, each contributing significantly to its overall revenue:
1. Food Segment: This is the largest segment, accounting for approximately 56.96 per cent of the company’s total revenue. It includes essential grocery items such as fresh produce, packaged foods and beverages.
2. Non-Food Segment: Contributing about 20.68 per cent to revenue, this segment encompasses personal care products, cleaning supplies, and other household goods.
3. General Merchandise and Apparel: This segment makes up around 22.37 per cent of revenue, offering clothing for men, women and children, as well as home goods and seasonal items. 

Financials FY24
For FY24, DMart reported a total revenue of ₹52,993 crore, marking a 4.4 per cent increase from ₹50,789 crore in FY23. However, this increase in revenue was accompanied by rising expenses, which totalled ₹46,683 crore in FY24, up 19.1 per cent from ₹39,201 crore in FY23. The increase was primarily driven by higher costs associated with purchasing stock-intrade and operational expenditures, with the cost of goods sold (COGS) being a major contributor. 

Despite the rise in expenses, DMart managed to maintain profitability. The company reported a net profit of ₹2,536 crore for FY24, an increase of 6.6 per cent from ₹2,378 crore in FY23. Its profit before tax also saw a healthy rise, reaching ₹3,461 crore compared to ₹3,060 crore in the previous year, representing an increase of approximately 13.1 per cent. 

For FY24, DMart reported operating cash flow of ₹27,458 crore, marking a 2 per cent increase from ₹27,029 crore in FY23. Its earnings per share (EPS) increased by 6.2 per cent, reaching ₹38.97 in FY24, up from ₹36.69 in the previous fiscal year. Additionally, other income for the year was reported at ₹145 crore, up from ₹128 crore in FY23, demonstrating improved financial management and the generation of additional revenue streams. 

Q1FY25
In Q1FY25, DMart reported total revenue of ₹14,069 crore, an impressive 18.57 per cent increase compared to ₹11,865 crore in Q1FY24. This growth was driven by increased footfall and a broader product mix, successfully attracting more customers to its stores. The company achieved a net profit of ₹774 crore in Q1FY25, reflecting a 17.46 per cent rise from ₹659 crore in the same quarter of the previous year. Its profit before tax for the quarter was ₹1,054 crore, up 17.48 per cent from ₹897 crore in Q1FY24. 

The EBITDA for this period was ₹1,221 crore, marking a 17.97 per cent growth compared to ₹1,035 crore in Q1FY24, while the EBITDA margin remained stable at 8.7 per cent. DMart also continued its expansion strategy by opening six new stores, bringing the total store count to 371 and increasing the total retail space to 15.4 million square feet, up from 13.5 million square feet in Q1FY24. This expansion has significantly contributed to revenue growth, with sales per square foot improving to ₹35,751, up from ₹34,071 in Q1FY24, indicating enhanced efficiency in sales generation. 

Growth Triggers
■ Store Expansion: DMart is set to open 40-50 stores annually, with a long-term goal of increasing this number to 60-70 stores per year.
■ E-Commerce Growth: The online grocery platform, DMart Ready, is focusing on scaling operations in existing cities. This strategy aims to optimise performance and increase market penetration in the e-commerce segment.
■ Pharmacy Business Launch: DMart has initiated a pilot for its pharmacy segment through its subsidiary, Reflect Healthcare and Retail Private Limited. This new venture is expected to diversify its product offerings and attract more customers.
■ High Revenue per Square Foot: Revenue from sales per retail business area in terms of square feet continues to show growth and is now trading at a time high of 32,941 and is expected to continue growing further. 

Competitive Landscape
Competitive intensity is also increasing because of the higher focus on e-retailers in the FMCG space. While ASL is a small player in the online FMCG space, other players such as Blinkit, BigBasket and Zepto, and new entrants such as JioMart, are registering aggressive growth. Though e-retail is a small proportion of the overall rating, it will remain monitorable over the medium term. 

Valuation
DMart has established a strong track record of financial performance, supported by strategic initiatives and significant growth potential. These factors have collectively contributed to its high valuation in the market. Currently, the company is trading at a price-to-earnings (PE) ratio of 132 times, near its median PE of 124 times. Its price and earnings to growth (PEG) ratio is 5.74 times. Moreover, DMart demonstrates robust operating cash flow and maintains a stable capital cycle. This allows investors to navigate market fluctuations effectively while continuing to invest in growth opportunities through ASL’s shares. 

Conclusion
In conclusion, while DMart’s current valuation is high, the company stands strong in the competitive landscape as a leading retailer, bolstered by its strong brand image and ability to generate consistent cash flows. These attributes position DMart favourably for continued success in the retail sector. Therefore, we recommend BUYING the stock.