Avenue Supermarts has delivered an impressive profitability performance in Q3FY26, prompting Motilal Oswal to maintain its BUY rating while revising the target price upward to ₹4,600. The retail chain demonstrated strong margin expansion capabilities despite a moderating revenue growth environment.

Strong Margin Performance Drives Profitability Beat

The company's Q3FY26 results showcased significant margin improvements across key metrics. D-Mart achieved substantial profitability gains through strategic margin management and operational efficiency.

The gross margin expansion was primarily attributed to GST reduction benefits leading to lower discounting requirements, combined with a favorable category mix. The retailer benefited from higher contributions from General Merchandise & Apparel (GM&A) and FMCG categories at the expense of the traditionally lower-margin Food category.

Operational Efficiency and Cost Management

After experiencing several quarters of elevated cost of retailing, D-Mart successfully stabilized its cost structure in Q3FY26. The company reported stable cost of retailing per square foot, which directly contributed to the 50 basis points EBITDA margin expansion and drove the 20% year-on-year standalone EBITDA growth.

Revenue Growth and Store Expansion Strategy

While profitability metrics exceeded expectations, revenue growth showed signs of moderation during the quarter.

The revenue growth of approximately 13% year-on-year was largely supported by the 14% store area addition, while like-for-like growth moderated to 5.60% compared to 6.80% in the previous quarter.

Expansion Trajectory and Growth Outlook

D-Mart's expansion strategy remains robust with consistent store additions across quarters. The company added 10 stores in Q3FY26, bringing the total to 27 new stores in 9MFY26 compared to 22 stores added in the same period last year. Motilal Oswal continues to project 60 store additions for the full FY26, indicating confidence in the company's expansion capabilities.

Investment Recommendation and Valuation

Motilal Oswal has assigned a 43x FY28 EV/EBITDA multiple, implying approximately 79x FY28 P/E ratio, to arrive at the revised target price of ₹4,600. The brokerage reiterates its BUY recommendation on Avenue Supermarts, citing the acceleration in store additions as the primary growth driver for the retail chain.

Avenue Supermarts Ltd., which operates the popular DMart retail chain, reported robust financial performance for the December quarter, driving its stock price up 3% on the National Stock Exchange. The shares reached an intraday high of ₹3,918.60 before settling at ₹3,783, demonstrating investor confidence in the company's operational execution despite a challenging retail environment.

Strong Financial Performance Drives Growth

The company delivered impressive financial metrics for the quarter ended December 2024, showcasing strong operational efficiency across key parameters.

The standout performance came from margin expansion, with gross margins reaching 14.6%, representing a 50 basis points improvement year-on-year. This margin expansion was 46-50 basis points higher than consensus estimates, indicating better-than-expected operational efficiency. EBITDA margins also improved by 47 basis points year-on-year, contributing to the 20% EBITDA growth that outpaced revenue growth of 13.3%.

Mixed Brokerage Sentiment on Sustainability

Despite the strong headline numbers, brokerage firms presented divergent views on the sustainability of DMart's performance, reflecting concerns about competitive pressures and demand trends.

Bullish Outlook: CLSA maintained the most optimistic stance, reiterating its High Conviction Outperform rating and raising the target price to ₹6,185. The brokerage highlighted that gross profit growth of 17.2% exceeded sales growth, demonstrating improved operational leverage. CLSA raised its FY26-FY28 earnings estimates by 1-7% to reflect stronger profit growth expectations.

Motilal Oswal reiterated its buy rating, increasing the target price to ₹4,600 from ₹4,300, while HDFC Securities maintained an add rating with a ₹4,000 target price.

Cautious Perspectives: Citi maintained a sell rating with a ₹3,150 target price, citing underlying demand slowdown concerns. The brokerage noted that same-store growth moderated to 5.6% from 6.8% in the September quarter and 7.1% in the June quarter. Management indicated that deflation in staples had partially impacted revenue growth, with actual revenue growth coming in about 3% below Citi's estimates.

Operational Challenges and Market Dynamics

Several operational factors emerged as key considerations for DMart's future performance. The company's profit growth has lagged revenue growth in 10 of the last 12 quarters, reflecting ongoing competitive and cost pressures in the retail sector.

Jefferies maintained a neutral hold rating with a ₹4,050 target price, noting that while EBITDA margins expanded to multi-quarter highs, revenue growth moderation continued. The brokerage flagged the upcoming CEO transition as a key development to monitor.

Nuvama retained its hold rating with a ₹4,351 target price, attributing the margin improvement to reduced discounting following GST rate cuts. The firm noted that DMart Ready's growth revived sequentially to over 20% year-on-year, indicating strength in the company's online delivery segment.

Market Position and Future Outlook

The results highlight DMart's ability to maintain profitability growth despite a challenging retail environment marked by increased competition from quick-commerce players. The margin expansion suggests effective cost management and pricing strategies, though sustainability remains a key question given competitive pressures.

The company's focus on store expansion continues steadily, with management expecting limited impact from new labor codes. However, analysts noted that disclosures remain an area requiring attention, and the competitive landscape with quick-commerce players poses ongoing challenges to margin sustainability in the near term.