D-Mart’s annual analyst call reinforced our cautious stance due to 1) Rising land acquisition costs, increasing wage inflation, and a deteriorating product mix which can further pressurize margins in the near to medium term. 2) Structural challenges persist in the apparel segment. 3) stiff competition from quick commerce players (more in top 20 cities). And 4) little visibility on D-Mart Ready’s path to profitability (FY25 margins declined 120bps with 34% higher losses at Rs2.48bn).
D’Mart has incurred a capex of Rs33bn in FY25 (Rs13bn in FY20), and we expect a capex of Rs50bn in FY29. We note that margin erosion and mix change have resulted in deterioration in ROE from 18% to 14% and cash surplus has also come down to ~Rs9bn (Rs40bn raised in QIP in Feb20). We expect ROE to decline to 12.5% over next 2 years (assuming debt funding of capex, higher decline with fund raises).
D’Mart has shown just 6.3% EBIDTA CAGR growth in past four quarters and is expected to return to double-digit growth from 2Q26 onwards on a low base. We factor in growth of 15-16% in Bills cuts and ~3% in average bill value over FY25-27 with 35bps margin contraction, resulting in 12.2% EPS CAGR. Although growth rate over next couple of years is expected to be higher than past 2 years, accelerated capex and gradual decline in ROE will prevent any major re-rating from current valuations of 78.7xJune27 EPS. Retail Hold.