Neville Noronha, CEO, Avenue Supermarts, had warned investors during an analyst meet in March this year that the market was in for a correction and the kind of margins the company had been offering would be unsustainable in the long run. His caution to the investor community turned out right. In the second quarter of fiscal year 2018/19, despite having registered revenue growth of 38.9 per cent (the highest in the last seven quarters) and earnings before interest, tax, depreciation and amortisation (EBITDA) and profit after tax (PAT) increasing by 22.6 per cent and 18.2 per cent, respectively, the value retailer's PAT margins dipped from 9.1 per cent to 8 per cent.
The country's most profitable retailer has been getting tough competition from the likes of Reliance Retail and Future Retail, as a result of which, it had cut prices across categories and this led to margin erosion. The company has also been aggressively opening new stores, which are on lease and are not owned by the company. One of the many reasons why the company became profitable much earlier than the rest was the fact that it owned its stores. However, with availability of good quality real estate becoming difficult and expensive, owning one's own store is not quite feasible. At the time of its IPO last year, the company was valued at Rs 40,000 crore and the projected growth rate was 40 per cent. To meet the growth numbers, the company needed to register Rs 4,000 crore turnover year-on-year as well as open 40-50 stores. Had the company done so, it would have surely tampered with its growth story.
"Slowdown of the D-Mart growth story was expected," says Arvind Singhal, Chairman of retail consultancy, Technopak. "It is very difficult to open stores at such a high pace." Singhal believes that D-Mart's large store format is also a stumbling block. He says that the advantage the likes of Reliance Retail or Future Retail have is multiple formats. "They have a combination of big and smaller formats which enables them to set up more stores. If you only have large format stores, it is difficult to set up more stores year-on-year."
The D-Mart growth story is a chicken-and-egg story, says Co-Founder, Ashok Maheshwari, who is now CEO of infrastructure company, Avenue Group. "Every store reaches a saturation point after being in existence for 5-8 years. The next level of growth and profits always comes from newer stores. However, opening 25-30 stores every year is not viable, hence, margins get compressed," explains Maheshwari.
Though Avenue Supermart's share price has dropped by 4.23 per cent, and some brokerages have downgraded the stock, veteran stock market broker, Arun Kejriwal, says that since margins are going to be difficult now, D-Mart Founder, Radhakrishna Damani has tweaked his strategy. "He is not burning cash to grow, he is willing to reduce margins and increase discounts. He is happier to increase the sales output."
Kejriwal says that losing out on margin is not really going to dent D-Mart's growth story. The retailer is known for paying upfront to many of its suppliers, so that it is able to procure at better prices and offer better discounts to its consumers. "I won't be surprised if Damani does that with all his suppliers and passes on deeper discounts to its customers," says Kejriwal.
But will D-Mart's exponential growth-run continue? Unlikely, say analysts.