Avenue Supermarts faces tempered store growth and quick commerce pressure in metros

Investment View and Recommendation

In its July 28, 2026 company update, Motilal Oswal Financial Services downgraded Avenue Supermarts, which operates DMart, to Neutral. The broker sees limited positive triggers as expectations for store expansion have moderated and quick commerce competition is affecting growth in dense metro catchments.

The revised target price is Rs 4,015, lowered from Rs 4,800, versus the current market price of Rs 3,851. The target is based on a 35 times September 2028E pre-IND AS EV/EBITDA multiple, implying around 60 times September 2028E P/E.

Store Expansion and Growth Outlook

Store additions remain DMart's most important growth lever. However, management indicated that the 20 per cent year-on-year acceleration achieved in FY26 is unlikely to be repeated in FY27. Management reiterated its disciplined execution philosophy and targets approximately 15 per cent annual store additions, subject to land acquisition, approvals and project execution.

DMart added 85 stores in FY26, taking its store base to 500. Motilal Oswal has reduced its FY27 store-opening assumption to 75 from 85 previously and now estimates 85 additions in FY28 and 90 in FY29, resulting in 750 stores by FY29E.

The broker notes that land acquisition and regulatory approvals, rather than capital availability or management bandwidth, are the principal constraints. DMart has 68 leased stores, representing around 13.5 per cent of its network, and 15 of the 85 FY26 openings were leased. Management is open to long-term leases and moderate leverage, while expecting internal cash flows to fund expansion over the next few years.

Same-Store Sales and Store Productivity

Management expects same-store sales growth to remain near FY26's approximately 8 per cent in the near term, although Q1 FY27 same-store sales growth was approximately 5.5 per cent. High-throughput metro stores face capacity constraints, self-cannibalisation from nearby new stores and rising quick commerce competition.

New tier-2 stores begin with lower productivity than metro stores, although their capital and operating costs are lower. Consequently, Motilal Oswal expects revenue per square foot and revenue per store to remain broadly muted as non-metro stores gain mix. FY26 same-store sales growth was 8.1 per cent, bill cuts increased around 13 per cent year-on-year to 398 million, and average basket value rose around 3 per cent to Rs 1,683.

DMart Ready and Quick Commerce Competition

DMart Ready has rationalised its footprint to 11 key cities and is focused on profitable scaling in its existing markets rather than aggressive geographical expansion. Management is prioritising assortment, customer experience and slotted deliveries in under six hours for larger basket orders rather than immediate deliveries.

DMart Ready has lower gross margins than offline stores because higher-margin general merchandise and apparel categories have a lower contribution. Management stated that quick commerce competition remains elevated and may persist, although its impact has so far been largely limited to high-density metro catchments.

DMart continues to prioritise its everyday low-price and everyday low-cost model. Private-label expansion remains selective under its 20:20:20 framework, targeting around 20 per cent customer savings versus leading brands, around 20 per cent higher margins and potential to reach 20 per cent volume share.

Margins, Capital Structure and Technology Investment

Management expects gross margins of 14-15 per cent and PAT margins of around 5 per cent, reinvesting sourcing and operating-leverage gains into pricing, people, technology and organisational capabilities. General Merchandise is expected to stabilise at around 22-23 per cent of sales.

Borrowings were around Rs 970 crore in FY26. Management said the recent NCD raise was intended to lower the cost of capital and that it was comfortable with debt of Rs 2,000 crore by FY27-end. Technology investments in ERP and the broader technology stack are intended to improve store scalability, execution and data-driven decision-making, with limited margin impact.

Financial Estimates and Valuation

Motilal Oswal reduced FY27-FY29E EBITDA estimates by around 2 per cent, reflecting its more measured expansion outlook. The broker forecasts FY26-FY29E consolidated revenue, EBITDA and PAT compound annual growth of 16-17 per cent, supported by around 250 store additions and mid-to-high single-digit like-for-like growth.

The revised target price of Rs 4,015 reflects the broker's lower expansion assumptions and valuation framework based on a 35 times September 2028E pre-IND AS EV/EBITDA multiple, implying around 60 times September 2028E P/E.

Key Downside Considerations

• Slower store additions than expected.
• Sustained quick commerce discounting and customer-acquisition intensity.
• Weaker growth in metro markets.
• Lower productivity from the growing tier-2 store mix.
• Potential pressure on growth and margins.