Avenue Supermarts Ltd’s muted September quarter (Q2FY26) earnings growth should ensure its shares remain range-bound in the foreseeable future.
Avenue, which owns and operates the DMart supermarket chain, faced continuous pressure on its standalone Ebitda margin, which contracted 28 basis points year-on-year to 7.58%. The quantum of Q2 Ebitda margin drop is the lowest in the past four quarters, so the trend is worth tracking ahead. Ebitda is short for earnings before interest, taxes, depreciation and amortization.
Higher staff costs and other expenses dragged down Q2 margin. Thus, Ebitda grew 11% to ₹1,230 crore. While growth is better than Q1’s 7.6%, it’s not encouraging. Competition in the quick-commerce sector and a weaker sales mix have been Avenue’s key challenges for some time now.
The share of the lower-margin foods segment in revenue rose to 57% in the first half of FY26 (H1FY26), from 56.4% in H1FY25. The share of higher-margin general merchandise and apparel dropped to 23.34% in H1FY26 from 23.45% in H1FY25. The non-foods segment, which enjoys better margins, contributes the remaining revenue.
Standalone Q2FY26 revenue growth of 15.4% on-year is the slowest in the past four quarters. Growth was also hurt as it passed on the benefit of lower goods and services tax (GST) to consumers. Like-for-like growth for stores operational for at least 24 months at the end of the reporting period was 6.8% in Q2 on a favourable base of 5.5% in Q2FY25.
Store addition boost
Sure, store additions aided growth. Eight new stores were added in Q2, bringing the total to 432 at the end of September, spread across 17.9 million square feet. Capital work-in-progress has risen nearly 40% in the past six months to around ₹1,500 crore as of 30 September, suggesting store additions could well be faster in H2 versus 17 stores added in H1.
Higher store openings could lift revenue growth in H2. “But this may also lead to an increase in costs in the near term and the company may have to further increase its debt, which could lead to lower margins and higher depreciation/interest expenses,” said a JM Financial Institutional Securities Ltd report on 11 October.
The broking firm has reduced its FY26-28 earnings per share (EPS) estimates by about 2%, baking in elevated opex cost, higher depreciation and interest cost owing to higher store additions, leading to a lower profit after tax (PAT) compound annual growth rate (CAGR) of 15% versus 18% revenue CAGR over FY25-28.
Note that Avenue’s PAT CAGR over FY23-25 was just 7% and H1FY26 growth is even lower at 4%. “This implies that DMart needs to deliver significant acceleration in revenue growth and profitability, or else there is a possibility of a further de-rating in target multiples,” said JM Financial.
Key monitorables
Meanwhile, Avenue opened 10 DMart Ready fulfilment centres in Q2 and exited five cities (now present in 19 cities). Following Q2 results, Avenue’s shares fell over 2% on Monday and are now about 15% away from 52-week highs of ₹4,949.50 apiece. The stock trades at approximately 88 times FY26 estimated earnings, according to Bloomberg, which is considered pricey.
The pace of store additions remains crucial. Further, “with quick-commerce players potentially shifting their focus to profitable growth, we believe the peak of competitive intensity may be behind us,” said Motilal Oswal Financial Services, adding, “however, increased pricing competition from the entry of large online/offline retailers in quick commerce remains a key monitorable and could weigh on DMart’s near-term growth and margins.”
