Prabhudas Lilladher has kept a 'Hold' rating on Avenue Supermarts (DMart), noting pressures from quick-commerce competition and rising costs. The brokerage highlights that heavy spending on expansion may limit returns for shareholders in the near term.
Prabhudas Lilladher has reiterated its 'Hold' stance on Avenue Supermarts, the company that operates the DMart retail chain, with a price target of Rs 4000. This cautious outlook follows the company’s recent annual analyst meeting, where the brokerage analyzed the firm's growth strategy against evolving market challenges.
Competitive Pressures and Cost Headwinds
A primary concern for the brokerage is the growing influence of quick-commerce players, particularly in large metro markets. This intense competition is forcing the company to balance its pricing strategy, potentially narrowing its traditional price advantage. Furthermore, the company is facing upward pressure on operating costs due to rising wage inflation. These factors, combined with a changing sales mix, are creating difficulties for the company in expanding its profit margins.
Capital Spending and Return on Equity
The brokerage also flagged the company’s increased spending on expansion as a factor affecting shareholder returns. Capital expenditure has surged significantly, rising to Rs 41 billion in FY26 compared to Rs 13 billion in FY20. Because this heavy investment is currently outpacing the company's internal cash generation, it has placed downward pressure on the Return on Equity (ROE). The brokerage noted that ROE has declined to approximately 13% in FY26, down from 16% in FY23, and expects little improvement in this metric in the near term.
E-commerce Strategy and Valuation
Avenue Supermarts’ e-commerce arm, D-Mart Ready, remains a focus area for investors. Prabhudas Lilladher has expressed uncertainty regarding the long-term profitability roadmap for this venture, which continues to require significant funding. While the brokerage forecasts that the company may see a recovery to double-digit EBITDA growth starting from the second quarter of FY27, it also warned that the stock currently trades at a valuation of 65 times its estimated earnings per share for FY28. According to the brokerage, this high valuation, coupled with structurally lower returns and ongoing expansion costs, may limit the potential for the stock to see significant upward re-rating.
Investors will likely track the company’s ability to manage its store-level profitability against competition and monitor whether the significant money spent on expansion translates into higher sales growth and improved profit margins in future quarters.