Higher competitive pressures to cap DMart's margins in near term

A weak operational performance in the fourth quarter (January-March) of financial year 2024-25 (Q4FY25) and muted near-term outlook due to intense competitive pressures and higher costs could lead to downward momentum on the stock.

While the stock dipped by 3.44 per cent in early trade on Monday, it recovered a bit to close 1.07 per cent lower at Rs 4,017.

The revenue performance of the retailer was healthy, registering a growth of 16.7 per cent year-on-year (Y-o-Y), aided by network expansion as well as higher same store sales (SSS) growth.

While the company’s store area grew 14 per cent, the rest was accounted for by a 2.7 per cent increase in revenue per store. SSS growth for units over two years old came in at 8.1 per cent.

The company added 28 stores in the quarter, taking the total to 415.

The Street was, however, disappointed with the margin performance and the cautious management commentary on the outlook.

Even as revenue growth was healthy, led by robust footfall, operating profit growth was one-fourth of top line gain at 4.4 per cent.

Gross margins were down 24 basis points (bps) Y-o-Y and 59 bps sequentially due to lower share of higher margin general merchandise and apparel while share of FMCG (fast moving consumer goods) increased.

At the operating level, the profitability fall was sharper at 80 bps over the year-ago quarter and 115 bps on a quarter-on-quarter (Q-o-Q) basis.

The operating profit margin was the lowest in 12 quarters.

The company pointed out that increased competitive intensity in the FMCG space impacted gross margins.

Further, a surge in wages of entry-level positions due to demand/supply mismatch of skilled workforce, and continued investments in improving service levels with respect to faster turnarounds on availability, checkouts and future store openings weighed on operating profits.

The company also had a larger number of store openings during this quarter.

Given the Q4 show and management commentary, Goldman Sachs Research has cut its earnings estimates, and maintained a “Sell” rating.

Analysts led by Arnab Mitra of the brokerage have cut their FY26 and FY27 earnings per share (EPS) estimates by 6 per cent and 4 per cent, respectively, as they build in lower operating profit margins.

This is due to increased competitive intensity and increasing inflation in areas like employee costs.

The recent fundraising by quick commerce (qcom) players and competitive pressures on pricing could weigh on DMart’s growth and margins at least in the near term, believes Motilal Oswal Research.

Over the long term, however, analysts led by Aditya Bansal say that DMart’s value-focused model and superior store economics would ensure its competitiveness and customer relevance despite qcom’s convenience.

While the brokerage has cut its FY26 and FY27 operating profit by 5 per cent each due to heightened competitive intensity and rising cost of retailing, it has reiterated its “Buy” rating with a lower revised target.

Centrum Research has downgraded its earnings by 6-7 per cent for FY26 and FY27, and cut its rating from “Add” to “Reduce” due to higher competitive intensity.

It has a revised target price of Rs 3,855 on FY27 earnings, with an unchanged price-to-earnings (P/E) ratio of 60 times, which is at a 30 per cent discount to its 10-year mean.

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