DMART A 574% Profit Jump That Isn't What It Looks Like

Reading Past the Headline Number

This filing covers the quarter ended June 30, 2022 - Q1 of Avenue Supermarts' FY2023. The year-on-year headline numbers look extraordinary: revenue up 93.67% to Rs. 10,038.07 crore, net income up 574.17% to Rs. 642.89 crore. Neither number means what it appears to mean. The comparison base, Q1 FY2022, was the quarter India's second COVID-19 wave forced fresh lockdowns and store closures across April-May 2021 - net margin that quarter collapsed to 1.84%, the second-weakest quarter in this site's entire coverage of the company. A 574% profit jump against that base isn't evidence of a business transformed; it's the arithmetic of comparing a normal quarter against an abnormally weak one.

The more honest read is the sequential comparison: revenue grew 14.25% and net income grew 50.63% against Q4 FY2022 (Rs. 8,786.45 crore revenue, Rs. 426.75 crore net income) - both healthy, both far more representative of the business's actual trajectory than the YoY figures above. Net margin recovered to 6.40%, the highest of any quarter in this site's coverage, including the pre-pandemic quarters - a genuinely strong result, just not a 574%-strong one.

The Prescription

DMart's actual, underlying story this quarter - a genuine margin expansion to 6.40% net margin on real double-digit sequential growth - deserves to be told on its own terms rather than let a base-effect YoY number do the talking. Management should keep pushing the same operating discipline that got margins here (tight cost control relative to the pandemic-recovery years now fully behind it). What it should stop doing: nothing operational - but the company's own investor communications (the accompanying presentation and August 2022 analyst call) should proactively flag the base-effect distortion in the YoY comparison rather than let a triple-digit-percentage headline stand unexplained, since a reader or journalist skimming just the top-line growth rate would draw a badly wrong conclusion about this quarter.

Key Financial Metrics

Quarter ended June 30, 2022 (consolidated), compared against Q1 FY2022 (quarter ended June 30, 2021) and, where noted, sequentially against Q4 FY2022

FX: INR 78.9630 = USD 1 (June 30, 2022 month-end).

Base-effect note: the year-ago comparison quarter (Q1 FY2022) was itself depressed by India's second COVID-19 wave - every YoY growth figure below is inflated relative to what a normal-to-normal comparison would show. The sequential (QoQ) figures in the far-right column are the more reliable read of this quarter's actual momentum.

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. 144.74 crore, up 34.72% year-on-year but down 1.09% sequentially - the first sequential decline in D&A this site has recorded, worth watching against last quarter's capex-driven jump) on top of that. No balance sheet or cash flow statement is disclosed in this filing.

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

Operating margin this quarter reached 8.89%, comfortably above every prior quarter in this site's coverage except the pandemic-distorted comparisons - and unlike the base-effect-driven YoY headline, the sequential 14.25% revenue growth and 42.68% operating-income growth are both real, uncontaminated numbers that say this specific quarter, on its own terms, was genuinely strong.

Beyond the Usual

A Textbook Base-Effect Quarter

Every major YoY growth figure this quarter - revenue (+93.67%), operating income (+502.32%), net income (+574.17%) - is substantially inflated by comparison against [Q1 FY2022](/analysis/dmart/2021-06/), a quarter depressed by India's second COVID-19 wave. This is disclosed nowhere in the filing itself; a reader relying only on the reported YoY percentages, without the context this site's own prior-quarter coverage provides, would badly overestimate how much the business actually improved. The sequential comparison in the table above is the more trustworthy read.

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. A transcript-intimation letter accompanies this quarter's results, but it is only a one-page regulatory cover note confirming that a call transcript was made available on the company's own website - it does not itself contain the call's actual content, so no management-commentary section is included this quarter.

Target Valuation Range

DMart traded at roughly Rs. 2,20,639 crore (~$27.9B) market capitalization at this quarter's close (June 30, 2022) - a trailing-twelve-month P/E near 108x, its lowest multiple in this site's coverage, as both the share price and the trailing-earnings base moved to make the ratio cheaper.

No real DCF is possible without a balance sheet. As a sanity check: trailing-twelve-month net income through this quarter (Rs. 417.76 + Rs. 552.53 + Rs. 426.75 + Rs. 642.89 crore = Rs. 2,039.93 crore) implies a trailing P/E near 108x - down sharply from Q4 FY2022's ~174x. Note that this drop is itself partly mechanical: the trailing-twelve-month window just replaced the second-COVID-wave-depressed Q1 FY2022 quarter with this quarter's strong result, inflating the trailing earnings base the same way it inflated the YoY growth figures above - a real but partly base-effect-driven compression, not purely a market re-rating.

As a peer-multiple cross-check: trailing-twelve-month revenue of roughly Rs. 35,831 crore against the ~Rs. 2,20,639 crore market cap implies an EV/Revenue multiple near 6.2x (market cap as an enterprise-value proxy) - the cheapest reading yet in this site's coverage, though still rich for a low-single-digit-net-margin grocery retailer by global standards.