Avenue Supermarts Ltd., the force behind the popular DMart retail chain, has encountered a slight dip in its profits for the fourth quarter, falling short of analysts’ forecasts. The company, led by the experienced Radhakishan Damani, reported a 2.2% year-on-year decline, resulting in a consolidated net profit of ₹551 crore for the January-March period. This decline highlights the challenges faced by the retail giant amidst a competitive landscape and rising operational costs.

Profitability Pressures Amid Expansion

Despite ambitious growth plans, DMart faced significant hurdles, including a challenging merchandise mix, aggressive discounts, and escalating expenses. The rising competition in the fast-moving consumer goods (FMCG) sector has intensified pressure on profit margins. Analysts noted a 50 basis point decline in the gross margin from general merchandise and apparel, reflecting the tough market conditions.

• DMart opened 28 new stores during this quarter, marking its highest single-quarter addition and bringing the total to 415 stores.
• For the entire fiscal year, the retailer added 50 stores, achieving a remarkable 22% increase compared to the previous year.

E-commerce Growth and Future Leadership Changes

The DMart Ready e-commerce platform is gaining traction, now operating in 25 cities, an increase from 23 last year. Management emphasized that home delivery services in major metropolitan areas are becoming increasingly popular, although losses in the online segment are anticipated to continue in the near future.

In a notable leadership transition, CEO Neville Noronha plans to gradually step back from daily operations, with a formal leadership handover to his successor expected within the next four to five months. Noronha will still prioritize store expansion and long-term strategic initiatives.

Brokerage Reactions and Target Price Adjustments

Brokerages reacted to DMart’s latest performance, adjusting their target prices and ratings:

• Jefferies has retained a ‘hold’ rating but reduced its target price from ₹4,225 to ₹4,100. They noted a margin shock, citing a standalone EBITDA margin drop of 80 basis points to 6.8%, the lowest since early 2022. Analysts cut earnings per share forecasts by 4-7% for fiscal years 2026 and 2027.

• Citi maintained a ‘sell’ recommendation, lowering its target price from ₹3,350 to ₹3,250. They pointed out a “double whammy” from competitive pressures and rising operating expenses, while also forecasting continued margin pressure.

• Nuvama has kept its ‘hold’ rating and slightly increased its target price to ₹4,273 from ₹4,212, acknowledging that while DMart has sustained over 15% revenue growth in the fourth quarter, it is still grappling with margin pressures.

Looking Ahead

As DMart navigates this challenging environment, the company’s focus on store expansion and enhancing its e-commerce capabilities will be crucial. With ongoing investments and strategic adjustments, DMart aims to fortify its position in the competitive retail landscape, ensuring long-term growth and profitability.

For more insights on stock market trends and recommendations, visit Morgan Stanley’s outlook on Indian stocks.