Equity Research : DMart

DMart is owned and operated by Avenue Supermarts Ltd., which was founded by Radhakishan Damani. Radhakishan Damani is a prominent Indian entrepreneur and investor.DMart primarily operates as a chain of hypermarkets and supermarkets. These stores offer a wide range of products, including groceries, fresh produce, apparel, electronics, household items, and more. DMart stores are known for their focus on providing products at competitive prices.

About the Company 

It is one of the largest and most popular supermarket and hypermarket chains in the country. Here are some key points about DMart:

1. Founder: DMart is owned and operated by Avenue Supermarts Ltd., which was founded by Radhakishan Damani. Radhakishan Damani is a prominent Indian entrepreneur and investor.

2. Retail Format: DMart primarily operates as a chain of hypermarkets and supermarkets. These stores offer a wide range of products, including groceries, fresh produce, apparel, electronics, household items, and more. DMart stores are known for their focus on providing products at competitive prices.

3. Business Model: DMart's business model is centered around offering customers value for their money. It is known for its everyday low price strategy, which means it tries to keep prices consistently low on a wide range of products.

4. Store Locations: DMart has an extensive presence across India. It operates stores in various cities and towns, serving both urban and semi-urban markets. The chain's extensive network of stores makes it easily accessible to a large customer base.

5. Customer Base: DMart primarily caters to the mass market segment in India. It is popular among middle-class and budget-conscious consumers who appreciate good quality products at affordable prices.

6. Private Label Products: DMart has a range of private label products under the name "DMart Select" and "DMart Ready." These products are offered at competitive prices and are known for their quality.

7. E-commerce: In addition to physical stores, DMart has ventured into the e-commerce space to provide customers with online shopping options. Customers can order products through the DMart website and have them delivered to their homes.

8. Growth and Success: DMart has experienced significant growth and success since its inception. The company's commitment to low prices, efficient supply chain management, and customer satisfaction has contributed to its popularity and financial success.

Industry Outlook

1. Rural Demand Improvement: The FMCG sector is expected to experience significant growth, driven by an improvement in rural demand. This is attributed to easing inflation and increasing agricultural revenues, leading to a gradual recovery in rural areas.

2. Steady Urban Demand: Urban demand remains steady, providing a stable foundation for the FMCG sector's growth.

3. Large Packs Driving Growth: There is a notable trend of consumers shifting towards medium and high-value packs in various FMCG categories. This transition is observed in beverages, personal care, and other branded product categories. Lower input prices and increased consumer purchasing power are expected to boost the demand for these larger packs.

4. Government Initiatives: Various government initiatives, such as the minimum support price (MSP), increased spending on rural infrastructure, and rising credit for agriculture and non-agricultural activities, are likely to boost employment and income levels in rural areas, further stimulating demand for FMCG products.

5. Consumer Preferences: Consumer preferences are evolving, with a focus on value-for-money products and usage efficiency. Consumers also consider the ethical standards of the businesses they support when making purchasing decisions.

6. Organized Sector Growth: As the share of the unorganized market in the FMCG sector declines, the organized sector is expected to expand. This growth will be supported by increased brand awareness and the expansion of modern retail.

7. Youth Population and E-commerce: The increasing youth population, particularly in urban areas, is a significant factor driving demand for FMCG products. The report highlights the crucial role of e-commerce in reaching rural markets. With the expected increase in internet users, e-commerce will become vital for FMCG companies.

8. Social Media Influence: Social media has a substantial impact on consumer buying trends. Social media influencers can play a role in retaining customers and contributing to sector-wide sales growth.

9. Industry Growth Projections: The report cites data from Statista.com, which projects the Indian FMCG industry to grow at a compound annual growth rate (CAGR) of 14.9%. The industry is expected to reach USD 220 billion by 2025 and USD 615 billion by 2027, up from USD 110 billion in 2020.

10. Company Expansion: Jyothy Labs, with revenue of Rs 2,486 crore in FY23, plans to expand its distribution network. The company will focus on growing its small pack segment and expanding in geographies with growth potential in both rural and urban markets.

Management

Financials

Dmart Q2 FY24 Result 

1. Revenue Growth: DMART's consolidated revenue grew by 18.7% year-on-year (YoY) in 2QFY24. At the standalone level, revenue increased by 18.5% YoY. This growth was primarily driven by the addition of new stores, with 11% YoY growth in store count. Notably, there was a 6% YoY improvement in revenue per square foot, indicating a higher contribution from larger-sized stores.

2. EBITDA Margin: The consolidated EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin for the quarter contracted by 40 basis points (bp) YoY, resulting in an 8% margin. This contraction was attributed to a mix-led reduction in gross margins, which was influenced by a reduced share of General Merchandise & Apparel (GM&A), as well as higher operating expenses.

3. Shift to Larger Stores: The diminishing gap between revenue per store and revenue per square foot suggests an improved share of larger-format stores in DMART's revenue mix. This is seen as a positive development and reflects the increasing contribution of larger stores to the company's overall revenue.

4. Growth Drivers: DMART's growth prospects appear favourable, driven by several factors:

   • Robust Store Additions: The company has added 72% more stores to its footprint from FY20 to FY23.
   • Cost Efficiencies: DMART has been effectively managing costs, contributing to its growth.
   • Recovery in Discretionary Demand: With the onset of the festive season, there is expected to be a rebound in discretionary consumer spending, which is likely to support DMART's growth.

Valuation and Outlook

1. Revenue Growth: DMART achieved a 19% Compound Annual Growth Rate (CAGR) in revenue from FY20 to FY23, driven primarily by a 20% increase in the number of stores added to its footprint during this period.

2. Subdued Same Store Sales Growth (SSSG): The company experienced subdued SSSG, which can be attributed to two main factors:

   • Addition of Larger Stores: DMART added bigger stores over the past couple of years, resulting in a 20% increase in the average store size. This shift impacted SSSG.
   • Weak Discretionary Demand: The share of discretionary items in total sales decreased from 27% in FY20 to 23% in FY23, indicating reduced demand for non-essential products.

3. EBITDA Margin Protection: Despite the challenges in SSSG, DMART managed to maintain its EBITDA margin at pre-Covid levels. This was achieved through strong cost-control measures, setting it apart from many other retailers who struggled with margins.

4. Improved Revenue per Square Foot: The recovery in revenue per square foot and the narrowing gap between revenue per store and revenue per square foot suggest an increased contribution from larger-format stores. This is seen as a positive development for the company.

5. Prospects for SSSG Improvement: DMART's prospects for improving SSSG are linked to several factors:

   • Moderating Inflation: As inflation moderates, it is expected to positively influence consumer spending.
   • Onset of the Festive Season: The festive season traditionally boosts consumer demand, especially for discretionary items. DMART expects this season to help improve SSSG.

6. Key Monitorable for Margin Improvement: The recovery within the higher-margin category of General Merchandise & Apparel (GM&A) is identified as a critical factor to watch for margin improvement in the future.

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