DMART Revenue Grew 18%. Profit Barely Moved. Here's Why.

Where the Growth Actually Went

This filing covers the quarter ended March 31, 2022 - Q4 of Avenue Supermarts' FY2022, and the first quarter in this site's full coverage of DMart where revenue growth and profit growth genuinely diverge in the wrong direction. Revenue grew 18.55% year-on-year to Rs. 8,786.45 crore - a healthy, unremarkable growth rate consistent with the prior quarter's steady-state read. But net income grew just 3.11% to Rs. 426.75 crore, the slowest profit growth of any quarter in this site's coverage of the company outside the pandemic's own worst quarters.

Two things explain almost all of the gap. First, Depreciation and Amortisation jumped 39.41% year-on-year to Rs. 146.33 crore - more than double the rate of revenue growth, and the clearest sign yet that the store-expansion capex DMart has been running through the pandemic is now showing up meaningfully in the cost base. Second, the effective tax rate rose to 29.91% from 23.86% a year ago - itself a partial reversal of the tax-rate cut flagged in the Q4 FY2021 post, moving back toward, though still below, the pre-2019-cut rate. Profit before tax still grew a reasonable 12.02%; it's the combination of faster depreciation eating into operating income and a higher tax bite on what's left that compressed net income growth down to barely more than inflation.

The Prescription

Rising depreciation from real capex is exactly what a company executing a genuine store-expansion strategy should show - it's not, on its own, a red flag, and management shouldn't slow store openings just to protect a quarter's net-income optics. What it should stop doing: continuing to say nothing at all, in the filing itself, about what's driving the depreciation jump - a reader has to infer "new stores" from context rather than the company confirming it, and a quarter where net income growth falls this far behind revenue growth is exactly the moment a company should proactively explain the gap rather than let a reader wonder if something structural has gone wrong.

Key Financial Metrics

Quarter ended March 31, 2022 (consolidated), compared against Q4 FY2021 (quarter ended March 31, 2021)

FX: INR 75.9092 = USD 1 (March 31, 2022 month-end).

Operating Income and Adjusted EBITDA are reconstructed the same way as every DMart quarter on this site: Operating Income = Profit Before Tax + Finance Costs; Adjusted EBITDA adds back Depreciation and Amortisation (Rs. 146.33 crore, up 39.41% year-on-year) on top of that. Note that the EBITDA margin held up far better than the operating-income margin this quarter - the entire gap between the two YoY growth rates (+16.81% EBITDA vs. +12.54% operating income) is the depreciation jump itself, which EBITDA by definition excludes. No balance sheet or cash flow statement is disclosed as a separable quarter figure in this filing (the combined Q4/annual filing again includes an annual cash flow statement, not a quarter-specific one - see Q4 FY2021's note on the same limitation).

Paid-up equity share capital held flat at Rs. 647.775 crore.

Depreciation grew 39.41% year-on-year while revenue grew 18.55% - a ratio that, if it continued, would eventually make every future quarter's revenue growth look weaker on the bottom line than it should. Whether this is a one-quarter step-change (a large cohort of new stores hitting their first full quarter of depreciation together) or the start of a sustained trend is the single most important thing to watch in DMart's next few quarters, more than the headline growth number itself.

Stock Price: The First Real Pullback

DMart's stock closed this quarter at Rs. 4,003.35 - down 14.30% from Rs. 4,671.45 at the end of Q3 FY2022, the first quarter-over-quarter decline in the stock price tracked anywhere in this site's coverage of DMart. Over the trailing two years to this quarter's close, the stock ranged from a low of Rs. 2,063.45 (early 2020) to a high of Rs. 4,710.90 (November 2021) before pulling back into this close - a genuine, if modest, re-rating lower, coinciding with the broader Indian equity market's own early-2022 correction (rising global interest rates and inflation concerns) rather than being obviously specific to this quarter's own numbers.

Beyond the Usual

The Tax-Rate Reversal Is Now Two Quarters Deep

[The Q4 FY2021 post](/analysis/dmart/2021-03/#beyond-the-usual) flagged the effective tax rate climbing back from an unusually low 18.60% base to 23.86%, reversing the tax-cut-driven flattery in [the Q4 FY2020 post](/analysis/dmart/2020-03/#beyond-the-usual). This quarter's rate climbed further, to 29.91% - now meaningfully above the 25.17% concessional corporate rate India introduced in September 2019, suggesting DMart either isn't fully utilizing the concessional regime's benefits this quarter or is absorbing some other one-time tax item the filing doesn't explain. Two consecutive years of rising effective tax rates, with no disclosed mechanism either time, is a pattern worth watching rather than a one-off.

This filing has no notes-on-financial-results text disclosed beyond a pointer to "the scan copy of results" (not available in the source downloaded for this post), so there are no footnote sections to mine this quarter, consistent with every prior quarter in this arc.

Target Valuation Range

DMart traded at roughly Rs. 2,59,327 crore (~$34.2B) market capitalization at this quarter's close (March 31, 2022) - a trailing-twelve-month P/E near 174x, its first meaningful multiple compression in this site's coverage, even though trailing earnings actually kept growing.

No real DCF is possible without a balance sheet. Trailing-twelve-month net income through this quarter (Rs. 95.36 + Rs. 417.76 + Rs. 552.53 + Rs. 426.75 crore = Rs. 1,492.40 crore, the full FY2022 figure since this is the fourth quarter) implies a trailing P/E near 174x - down from Q3 FY2022's ~205x, the first real compression in this multiple across this site's coverage, driven by the stock price falling faster than trailing earnings this quarter. Trailing-twelve-month revenue of roughly Rs. 30,976 crore against the ~Rs. 2,59,327 crore market cap implies an EV/Revenue multiple near 8.4x (market cap as an enterprise-value proxy) - also down from the prior quarter's ~10.2x.

This is the first quarter where the valuation moved in the same direction as this site's own read of the fundamentals (margin compression, a rising tax rate, decelerating profit growth) rather than against it - still an expensive multiple in absolute terms, but a meaningfully less stretched one than three quarters earlier.

As a sanity check only, here's what a peer-floor bear case, a status-quo base case, and a re-acceleration bull case each imply on EV/Revenue applied to this quarter's ~Rs. 30,976 crore TTM revenue: