DMart Shares: CLSA Sees 60% Upside on Store Additions

Introduction

Shares of Avenue Supermarts Ltd., the parent company of retail giant DMart, gained investor attention after brokerage firm CLSA reiterated its positive outlook, citing a significant acceleration in store additions. The firm's analysis suggests a substantial upside potential for the stock, reinforcing confidence in the retailer's aggressive expansion strategy. This endorsement comes as the company prepares to release its fourth-quarter business updates, a key event for investors tracking its growth trajectory.

CLSA's High Conviction Call

CLSA maintained its 'high conviction outperform' rating on Avenue Supermarts, setting a price target of ₹6,185 per share. This target implies a potential upside of approximately 58.5% from the stock's previous closing price of ₹3,903.2. The brokerage's confidence is primarily anchored in the company's physical expansion, which has surpassed initial market expectations for the current fiscal year. This bullish stance contrasts with a more divided sentiment across the broader analyst community, making CLSA's position particularly noteworthy.

Expansion Surpasses Expectations

A key driver behind the optimistic forecast is DMart's rapid pace of opening new stores. The company launched nine new outlets in just three days, bringing its total store count to 481. For the fiscal year, DMart has added 66 new stores, already exceeding CLSA's initial projection of 60 additions for the entire year. The fourth quarter has been especially active, with 39 stores opened so far, a significant increase from the 28 stores opened during the same period last year. This accelerated rollout signals a strong execution of its growth plans and strengthens its footprint across the country.

A Look at Q3 Financials

Avenue Supermarts' expansion is supported by a solid financial performance. In the third quarter, the company reported a 17% year-on-year increase in net profit, which stood at ₹856 crore. Revenue from operations grew by 13.3% to ₹18,101 crore. The company also demonstrated improved operational efficiency, with Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) rising by 20.2% to ₹1,463 crore. Consequently, its EBITDA margin expanded to 8.1% from 7.7% in the corresponding period of the previous year, indicating better profitability despite the costs associated with rapid expansion.

Stock Performance and Market Sentiment

Following the report, shares of Avenue Supermarts recovered from intraday lows, closing up by 1% at ₹3,942.2. The stock has seen gains for three consecutive sessions. However, the longer-term view presents a mixed picture, with the stock having declined by 11.9% over the last six months. Analyst sentiment remains divided. Among the 29 analysts covering the stock, ten recommend a 'buy', eleven suggest a 'hold', and eight advise a 'sell'. This split highlights the differing views on the company's valuation versus its growth prospects.

Key Financial and Operational Metrics

DMart's Competitive Edge

CLSA has previously highlighted DMart's "deeply moated business model" as a core strength. This refers to the company's sustainable competitive advantages, such as its low-cost operational structure, efficient supply chain, and strong value proposition for price-sensitive Indian consumers. By focusing on a curated range of products in the Foods, Non-Foods (FMCG), and General Merchandise & Apparel categories, DMart maintains high inventory turnover and strong customer loyalty. This model has proven resilient and difficult for competitors to replicate.

Long-Term Growth Trajectory

Looking ahead, CLSA anticipates Avenue Supermarts' revenue to grow at a compound annual growth rate (CAGR) of 15-20% between FY25 and FY28. This growth is expected to be driven by the addition of 155 to 225 new stores over that period. The brokerage also projects a significant increase in earnings per share (EPS), forecasting it to reach ₹30.2 by FY28. This long-term view suggests that the current phase of aggressive capital expenditure on store expansion will translate into strong free cash flow and earnings growth as the network matures, mirroring the trajectory of global retail leaders.

Conclusion

CLSA's 'high conviction' call on Avenue Supermarts places a spotlight on the company's successful and accelerated store expansion strategy. While the brokerage sees significant value waiting to be unlocked, the broader market remains cautiously optimistic, as reflected in the divided analyst ratings. The company's strong Q3 performance provides a solid foundation for its growth ambitions. Investors will be closely watching the upcoming fourth-quarter business update for further confirmation of this momentum.