Sales in Q3 were led by higher billing per customer with consumers making fewer trips. Its e-commerce operation,
Ready, continues to grow on a small base (up 92 per cent to Rs 109 crore) with the company expanding its presence in Ahmedabad, Bengaluru, and Hyderabad. The company is also increasing its general merchandise in the online space with the inclusion of home furnishing, small electrical items, and kitchen aids.
Ready, however, is still a small part of consolidated revenues (1-2 per cent) and is making losses at the operating level.
Despite an inferior mix with sales tilted towards staples and fast-moving consumer goods (FMCG), the company was able to improve its operating profit margins by 50 basis points over the year-ago quarter to 9.3 per cent. In addition to revenue growth, the company has kept a tight control over costs, with other expenses falling by 7 per cent.
While reported margins are at a six-quarter high, the company may struggle to maintain that. The management highlighted that it is facing inconsistent supplies from the non-FMCG sector and raw material costs too are trending up. Lack of availability, coupled with rising prices, could impact its volumes and margins in the current quarter.
On the product mix front, the company highlighted the sluggish offtake of out-of-home segments such as apparel, laundry, footwear, travel among others. Given that these could take time to hit their peak, the mix could remain adverse in the near term, away from these higher margin segments and towards the staples segment.
Analysts are confident about the growth opportunities for the company fueled by expansion in the online and physical retail formats as well as a strong balance sheet. Grocery retailers such as DMart
were able to recover faster than other retail segments and could gain market share in the near term as competitive intensity reduces (Future group). Motilal Oswal Research expects revenues and operating profit to grow at 23 per cent each over the FY20-23 period.
The company’s expansion and growth trajectory are, however, fully factored into valuations. At the current price, the stock is trading at over 75 times its FY23 earnings estimates. Himanshu Nayyar of YES Securities expects a period of consolidation in the stock with investors waiting to see the impact of aggressive online competition in the grocery space.