HSBC Keeps Buy On DMart Retail Store Operator, Lifts Target Price

Global brokerage HSBC reiterated its Buy call on Avenue Supermarts Ltd., which operates DMart retail store chain, and raised its target price to 5,700 rupees from 5,330 rupees per share.

“Value retailing remains the core positioning of DMart and will be central to all its offline and online retail endeavors,” the brokerage said in a research note after the company’s Investor Day 2024.

HSBC said DMart has had an exceptional run this year (stock up 25% year-to-date versus +14% for Nifty50 index) as the network rollout accelerated and normalcy in general merchandise returned.

Increasingly, it also became clear that DMart’s business model is formidable and remained unscathed by the rise of quick commerce that was previously feared, the brokerage noted.

HSBC said the Investor Day 2024 further reinforced these messages. Following are the key highlights:

• Value Retailing: DMart’s core strategy and value proposition rest on superior value to customers whether in offline or online channels and this remains central to its strategy and execution.

• Gross Margin Trajectory: DMart will continue to operate in a gross margin range of 14.5% to 15.5% with an aim to pass on the benefits of scale, procurement and efficiency gains to consumers to reinforce its value credentials.

• Quick Commerce Impact: There is little impact of quick commerce on the company. DMart sees QC as serving a very different need (convenience), where the consumer is willing to pay for instant delivery. The rise of quick commerce has had very little impact on DMart, which is focused on providing superior value to customers as its main appeal.

• General Merchandise & Apparel: DMart suggests that the drag of general merchandise and apparel business is now over, and the business is on an improving trajectory. However, its salience in the revenue mix is unlikely to reach historical levels of 27%-28% and will remain around 23% of overall revenue.

• Accelerating Network Rollout: Management sees expanding the store network as the key focus and intends to grow it at around 15%-20% CAGR. The management believes that it has all the other capabilities in place to run stores efficiently and expects to open around 40-50 stores in FY25 and accelerate this with scale.

• DMart Ready: With operations in 23 cities (+10 in FY23 and +1 in FY24), management is much more confident about its business model and continues to deepen service levels and throughput before scaling up in more cities.

The brokerage said DMart intends to accelerate network expansion, which is the key source of value creation. “Valuation builds in a long-term earnings growth expectation of 14%-15%, which is well within the growth opportunity we see in grocery retail,” it noted.

Avenue Supermarts closed at 5,014 rupees on the National Stock Exchange in Mumbai trading yesterday.

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