Avenue Supermarts’ Q2 earnings-revenue mismatch is a problem

Avenue Supermarts’ revenue growth performance was already known from its September quarter (Q2FY27) update on 3 October, so margins were in the spotlight when results were announced on Saturday. Here, investors must brace for some disappointment, as margins have dipped.

Standalone Ebitda margin decreased by 102 basis points (bps) sequentially and contracted 28 bps year-on-year to 7.3% in Q2, coming in below expectations. Ebitda increased by 14% year-on-year to ₹1,403 crore. Some analysts have now trimmed their earnings estimates for FY27 and FY28.

Avenue, which runs the DMart supermarket chain, faced challenges from cost pressures and intensifying competition from quick-commerce companies.

“Store expansion remained modest, but productivity softened, as evidenced by a multi-quarter low unit Ebitda for Q2,” said Jefferies India’s analysts in a report on 11 October, adding Ebitda per store/sqft declined by about 4% year-on-year. The brokerage has cut its earnings per share (EPS) estimates by 2-3% to factor in the Q2 earnings miss, and revised its price target for the stock lower to ₹4,000. Avenue’s shares fell by about 4% on Monday to ₹3,384, further extending last week’s 7.8% drop.

Margin pressure

Gross margin contracted 10 bps to 14.15%, adding to Ebitda pressure. The company said wage inflation at entry-level has led to a marginal increase in operating expenses. Staff costs and other expenses in Q2 rose 20% and 22.5% year-on-year, respectively. Both increases exceeded revenue growth of 18.4%, a notable improvement from Q1’s 15.1%, which had declined from the 19% growth seen in Q4FY26.

Two-year-old and older DMart stores grew by 9.5% in Q2FY27, which looks good compared with 5.5% in Q1 and 6.8% in Q2FY26. However, some analysts point out that new stores are likely seeing a slower ramp-up. The company opened 15 new stores last quarter, versus three in Q1, taking the total count to 518.

Avenue’s store additions in Q2FY27 imply around 19% year-on-year addition in retail area, compared with 13-14% before Q4FY26, reckons Emkay Global Financial Services. “However, both accelerated store expansion and inflationary trends have not contributed to a commensurate increase in growth so far,” it pointed out in an 11 October report.

Profitability squeeze

Avenue’s Q2FY27 net profit growth was even slower, at 7.6% to ₹804 crore, driven by lower other income and a sharp 87% rise in interest expenses to ₹59.6 crore following debt issuances in recent quarters. Depreciation costs rose 26% to ₹287 crore. Total debt increased to ₹4,079 crore as of September-end from ₹2,267 crore six months ago.

Meanwhile, Avenue is focused on improving operational efficiencies and strengthening customer experience across existing markets in its e-commerce business, DMart Ready. It was present in 11 cities in H1FY27, versus 19 in H1FY26.

Overall store additions are expected to pick up in the second half of FY27, which could support revenue growth. To be sure, Avenue is navigating a difficult growth and earnings path as quick-commerce companies widen their reach. “Dark-store network densities in metros/tier-1 cities and an expanding delivery portfolio in non-grocery categories continue to weigh on store footfalls and planned purchases,” said ICICI Securities.

Against this backdrop, Avenue’s shares have fallen 22% over the past year. Valuations have moderated to nearly 54 times estimated FY27 earnings, as per Bloomberg. The stock lacks meaningful triggers for outperformance in the immediate future. Investors would cheer consistently improved like-for-like growth performance ahead.