DMart Shares Drop 9% Following Downgrades from Brokerages on Disappointing Q2 Results

Shares of Avenue Supermarts, the parent company of retail giant DMart, plunged by 9.3% in early trade on Monday, hitting a day’s low of ₹4,143.60 on the Bombay Stock Exchange (BSE). The drop followed a wave of downgrades from prominent brokerage firms, all of which cited concerns over DMart’s disappointing second-quarter (Q2) performance for FY25.

Key Financial Performance: Earnings Miss Disappoints Market

DMart reported a year-on-year (YoY) profit increase of 8% for Q2, but this growth was overshadowed by a sequential decline in profit after tax (PAT). The company’s PAT fell over 12%, from ₹812.45 crore in Q1 to ₹659.44 crore in Q2 FY25. The underwhelming results were attributed to rising costs, stiff competition from online grocery players, and the growing quick commerce segment.

Despite a 14% YoY increase in revenue, which stood at ₹14,050.32 crore in Q2 compared to ₹12,307.72 crore last year, the company struggled with operating margins. The pressure from increasing investments and competitive pricing in large metro markets hurt profitability.

Brokerage Downgrades: A Common Theme of Cost and Competition

Several top-tier brokerage firms reacted swiftly to DMart’s Q2 miss, downgrading the stock and cutting their target prices significantly:

JPMorgan: Neutral | Target Price: ₹4,700

JPMorgan downgraded DMart’s stock rating to “Neutral” from “Overweight” and slashed the target price from ₹5,400 to ₹4,700. According to JPMorgan analysts, the moderation in like-for-like (LFL) growth and rising operational costs during the quarter were concerning. The quick commerce segment, which includes faster delivery services, has posed a bigger threat than anticipated, especially in metro markets where competition is fierce. Increased investments are necessary, but they are putting pressure on margins.

Morgan Stanley: Underweight | Target Price: ₹3,702

Morgan Stanley followed suit, downgrading DMart to an “Underweight” rating from “Overweight.” The brokerage set a lower target price of ₹3,702, down from ₹5,769. Morgan Stanley analysts expressed disappointment with DMart’s Q2 top-line growth and margin performance. With online grocery formats rapidly gaining market share, the brokerage raised concerns about DMart’s ability to maintain a 20% growth rate in the long term, potentially necessitating a re-evaluation of its overall growth strategy.

Nuvama: Hold | Target Price: ₹5,040

Nuvama retained a “Hold” rating but lowered the target price from ₹5,183 to ₹5,040, reflecting cautious optimism. The brokerage noted DMart’s weaker-than-expected Q2 results, citing slower store productivity and a sharp drop in LFL growth, which came in at 5.5% YoY compared to 9.1% in Q1 FY25. Although the company’s revenue growth remained strong, margin compression driven by higher operating costs raised red flags.

Prabhudas Lilladher: Hold | Target Price: ₹4,748

Prabhudas Lilladher also downgraded DMart to “Hold” from “Accumulate” and cut the target price to ₹4,748 from ₹5,168. The brokerage highlighted declining same-store sales growth (SSG) and other weak retail metrics, exacerbated by competition from quick commerce and online grocery platforms. Metro cities, in particular, have seen significant impacts on store performance.

DMart’s Strategic Response and Future Outlook

While DMart’s second-quarter results fell short of market expectations, the company has been expanding its physical footprint. During Q2 FY25, DMart opened six new stores, bringing its total store count to 377 as of September 30, 2024. However, the company’s CEO, Neville Noronha, acknowledged the challenges posed by online grocery services, especially in metro areas where DMart has traditionally thrived.

In terms of growth metrics, DMart’s like-for-like revenue growth for stores older than two years was 5.5% in Q2 FY25, down from 9.5% in Q1 FY25. For H1 FY25, LFL growth stood at 7.4%, indicating a slowdown in same-store sales performance.

The company’s quick commerce offering, DMart Ready, has also experienced a decline in growth, with year-on-year expansion slowing to 22% for H1 FY25 compared to 32% in FY24. This deceleration is concerning, given the increasing consumer preference for fast and convenient online grocery options.

Rising Expenses: A Growing Concern

Total expenses for DMart rose by 14.9% in Q2 FY25 to ₹13,574.83 crore, reflecting the company’s efforts to maintain service levels and competitive pricing. However, this has come at the cost of operating margins, which have been compressed due to rising expenses and increased investments in new stores and service improvements.

Despite these challenges, DMart’s overall revenue from operations rose by 14.41% YoY to ₹14,444.50 crore, a positive signal amid the more concerning profitability and growth issues.

Competition in the Retail Sector

The rising competition from both traditional and online retailers has forced DMart to reconsider its long-term growth strategies. As Morgan Stanley pointed out, companies can no longer rely solely on defensive measures to fend off competitors in the fast-growing quick commerce and online grocery segments.

DMart’s management has acknowledged the need for diversification and innovation in the face of increasing online competition. Expanding DMart Ready’s footprint and exploring partnerships or acquisitions may be on the horizon as the company adapts to the rapidly changing retail landscape.

Challenges Ahead for DMart

The sharp decline in DMart’s share price and the wave of downgrades from brokerages underscore the challenges facing the retail giant. While the company’s strong revenue growth is promising, concerns about rising costs, margin compression, and competition from online grocery formats are clouding its future outlook.

For now, DMart’s focus on expanding its physical store network and enhancing service offerings may help stabilize its position in the market, but the road ahead is fraught with challenges, particularly in the highly competitive quick commerce space.