Motilal Oswal has lowered its target price for Avenue Supermarts (DMart) to Rs 3,925 from Rs 4,000, while maintaining a 'Neutral' rating. The adjustment follows Q2 FY27 results where profitability missed analyst estimates due to rising operational costs and intense competition from quick-commerce players.
Avenue Supermarts, the operator of the DMart retail chain, has seen its target price revised downward by brokerage firm Motilal Oswal. The new target price of Rs 3,925 reflects concerns over persistent margin pressure and profitability challenges, even as the company continues to expand its retail footprint.
In its latest assessment, the brokerage maintained a 'Neutral' rating on the stock. This decision comes on the back of the company's Q2 FY27 financial results, which presented a mixed picture for investors. While the retailer reported a robust 18% year-on-year growth in consolidated revenue, rising to Rs 19,644 crore, the bottom-line performance struggled to meet market expectations. Net profit, while positive, did not keep pace with revenue growth, and key profitability metrics missed analyst estimates.
Operating profit margins, a critical measure for retail businesses, contracted by approximately 30 basis points compared to the previous year. This dip is primarily linked to two factors: the increasing cost of doing business and intense competition. The company is facing rising wage inflation at the entry level, which has pushed up retail costs per square foot. Additionally, the aggressive discounting and delivery strategies adopted by quick-commerce platforms are creating a challenging environment, particularly in dense urban clusters where DMart operates many of its stores.
Despite these headwinds, the company’s expansion strategy remains active. During the September quarter, DMart added 15 new stores, taking its total network to 518 outlets—a 20% increase in store count compared to the previous year. There were also positive signs in sales data, with like-for-like sales growth for stores older than two years recovering to 9.5%, up from 6.8% in the same quarter last year.
The brokerage indicated that while the company is successfully growing its revenue through physical expansion and improved sales at existing stores, the current competitive landscape is making it difficult to maintain higher profit margins. The combination of high operational costs and the need to compete with quick-commerce platforms suggests that significant margin expansion may remain elusive in the near term.
For investors, the key area to monitor in the coming quarters will be whether DMart can manage its operational costs effectively while navigating the pressure from quick-commerce competitors. The company's ability to balance rapid store expansion with maintaining or improving its operating profit margin will be a significant indicator of its financial performance.