PremiumMUMBAI : When the going gets tough, the tough get going. That probably sums up what food and grocery retailer Avenue Supermarts Ltd’s financial year 2021 (FY21) has been like. Avenue runs the DMart chain of retail stores.
The company’s first half of FY21 was terribly hit by the impact of the covid-19 pandemic with standalone revenues declining by around 34% year-on-year in the June quarter. Revenue drop was curtailed to 12% in the September quarter. Subsequent quarters saw further improvement. In fact, revenues increased in the December quarter by 10% year-on-year. Revenue growth further improved in the March quarter at 18%.
Premium Premium But the big problem now is that India is witnessing a second wave and that means Avenue’s recovery would be cut short. JM Financial Institutional Securities Ltd’s analysts sum it up beautifully, “Progression here onwards could have been as if nothing had happened in between, had the second wave of the pandemic not struck."
The broker added in a report on 8 May, “DMart’s March quarter report reflects the business’ near-total return to normalcy within 9-12 months of lockdown-related disruptions first setting-in during March 2020. Revenue per store is up 8% versus March 2019 quarter level with margin also higher versus two-year ago level."
The new covid wave has led to the imposition of various restrictions across regions, which is likely to hit Avenue’s revenues in the foreseeable future. Taking note of this, analysts have trimmed their revenue estimates for FY22.
Avenue said, “In general, more than 80% of our stores are operating for 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 shut downs are having an adverse and severe impact on our revenues."
In FY21, the company opened 22 new stores and converted 2 stores into fulfilment centres for Avenue E-Commerce Ltd, taking the total store count to 234 as on March-end.
Coming to the March quarter results, earnings before interest, tax, depreciation, and amortization (Ebitda) margin stood at 8.4%, representing a decline of 86 basis points vis-à-vis the December quarter. One basis point is 0.01%. For perspective: Ebitda margin in the March 2020 and March 2019 quarters stood at 6.7% and 7.5%, respectively.
Overall, for FY21, Avenue’s revenues declined by 3.6% year-on-year but net earnings fell at a sharper rate of almost 14%. Weak operating margin performance weighed on profitability for the year, as Ebitda margins contracted by 128 basis points. In FY21, foods, non-foods (FMCG) and general merchandise and apparel, accounted for 57.4%, 19.69% and 22.90% of the revenues, respectively.
Meanwhile, in early deals on Monday, Avenue’s shares were trading marginally up on the National Stock Exchange. Understandably, covid-19 challenges have weighed on the sentiments for the stock, which has declined about 13% from its 52-weeks highs on 5 March. True, valuations have corrected a bit, but the stock still remains pricey.
As ICICI Securities Ltd’s analysts point out in a report on 9 May, “After the material (more than 35%) stock underperformance over last one year, valuations have become a tad more palatable (stock now trades at 73 times price-to-earnings ratio and 50 times Ebitda on FY2023e)." The broker’s target price of Rs2,600 is around 12% lower than DMart current share price.
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