Avenue Supermarts Ltd., India's largest organised retail chain operating the DMart brand, reported consolidated net profit of ₹685.01 crores for Q2 FY26, declining 11.38% quarter-on-quarter from ₹772.97 crores in Q1 FY26, though posting a modest 3.86% year-on-year growth from ₹659.58 crores in Q2 FY25. The ₹282,000 crore market capitalisation company witnessed its shares trading at ₹4,319.70 on October 12, 2025, reflecting investor caution as profitability margins contracted despite robust revenue expansion.
The quarter's results highlight a critical inflection point for the retail behemoth: whilst sales momentum remains healthy with 15.45% year-on-year growth to ₹16,676.30 crores, operating margins compressed significantly to 7.28% from 7.94% in the previous quarter, raising questions about cost management and competitive intensity in India's rapidly evolving retail landscape.
The sequential profit decline marks a concerning trend for a company that has historically demonstrated consistent operational excellence. Whilst year-on-year comparisons show growth, the pace has decelerated materially from the double-digit profit expansions witnessed in previous quarters, signalling potential structural headwinds in the business model.
Financial Performance: Revenue Growth Masks Margin Erosion
Avenue Supermarts delivered net sales of ₹16,676.30 crores in Q2 FY26, representing sequential growth of 1.94% from ₹16,359.70 crores in Q1 FY26 and year-on-year expansion of 15.45% from ₹14,444.50 crores in Q2 FY25. However, the revenue acceleration failed to translate into proportional profit growth, exposing operational inefficiencies.
Operating profit before depreciation, interest and tax (excluding other income) stood at ₹1,213.65 crores, yielding a margin of 7.28% compared to 7.94% in the previous quarter and 7.57% in the year-ago period. This 66 basis points sequential compression and 29 basis points year-on-year decline represents the most significant margin pressure the company has faced in recent quarters.
The profit after tax margin contracted to 4.11% in Q2 FY26 from 4.72% in Q1 FY26 and 4.57% in Q2 FY25, reflecting the cumulative impact of operating leverage deterioration and higher employee costs. Employee expenses surged to ₹376.83 crores from ₹346.86 crores quarter-on-quarter, indicating aggressive hiring or wage inflation as the company expands its store network.
| Quarter | Revenue (₹ Cr) | QoQ Growth | Net Profit (₹ Cr) | QoQ Growth | OPM % | PAT % |
|---|---|---|---|---|---|---|
| Sep'25 | 16,676.30 | +1.94% | 685.01 | -11.38% | 7.28% | 4.11% |
| Jun'25 | 16,359.70 | +10.00% | 772.97 | +40.31% | 7.94% | 4.72% |
| Mar'25 | 14,871.86 | -6.89% | 550.90 | -23.88% | 6.42% | 3.70% |
| Dec'24 | 15,972.55 | +10.58% | 723.72 | +9.72% | 7.62% | 4.53% |
| Sep'24 | 14,444.50 | +2.67% | 659.58 | -14.76% | 7.57% | 4.57% |
| Jun'24 | 14,069.14 | +10.55% | 773.82 | +37.38% | 8.68% | 5.50% |
| Mar'24 | 12,726.55 | -6.23% | 563.25 | -18.44% | 7.41% | 4.42% |
| Dec'23 | 13,572.47 | +7.51% | 690.61 | +10.75% | 8.25% | 5.09% |
The quarterly trend reveals a persistent pattern: March quarters consistently underperform with lower margins due to seasonal factors, followed by recovery in June quarters. However, the September 2025 quarter broke this recovery pattern, with margins declining despite the favourable seasonal window, suggesting deeper structural issues beyond typical quarterly variations.
Capital Efficiency: ROE Trends Signal Quality Concerns
Return on equity stood at 12.64% in the latest quarter, maintaining consistency with the five-year average of 12.19%. Whilst this level of capital efficiency remains respectable for a capital-intensive retail business, it represents a material decline from the company's historical peak performance and falls short of the premium valuations commanded by the stock.
The company's return on capital employed of 16.53% in the latest period, though healthy, has declined from the five-year average of 16.98%, indicating gradual erosion in the productivity of deployed capital. This deterioration becomes particularly concerning when viewed alongside the company's aggressive expansion strategy, which has seen fixed assets balloon to ₹14,457.08 crores as of March 2025 from ₹11,867.81 crores a year earlier.
Capital Deployment Warning
Avenue Supermarts' capital intensity is rising faster than returns generation. Fixed assets grew 21.83% year-on-year to ₹14,457 crores, whilst ROCE declined from 16.98% (5-year average) to 16.53%. Operating cash flow for FY25 stood at ₹2,462 crores against capital expenditure requirements exceeding ₹2,185 crores, leaving minimal cushion for shareholder returns whilst maintaining expansion pace.
The balance sheet remains fortress-like with zero long-term debt and a net cash position of ₹359 crores as of the latest reporting period. Shareholder funds stood at ₹21,427.75 crores as of March 2025, providing substantial equity cushion. However, the declining return ratios suggest the company may be entering a phase of diminishing returns on incremental capital deployment, a critical concern for growth investors.
Competitive Intensity: The Margin Squeeze Deepens
The margin compression witnessed in Q2 FY26 reflects intensifying competitive pressures in India's organised retail sector. Quick commerce platforms, e-commerce giants, and traditional retail chains are all vying for market share, forcing Avenue Supermarts to increase promotional spending and potentially sacrifice pricing power to maintain volume growth.
Employee costs rose 8.64% quarter-on-quarter to ₹376.83 crores, outpacing revenue growth of 1.94%, indicating operational deleverage. This trend suggests either aggressive store expansion requiring higher staffing levels or wage inflation pressures that cannot be fully passed through to consumers in the current competitive environment.
Other income declined to ₹19.57 crores in Q2 FY26 from ₹33.52 crores in the year-ago quarter, representing a 41.62% year-on-year drop. This non-operating income, typically derived from treasury operations and vendor arrangements, has been a consistent contributor to overall profitability, and its decline adds incremental pressure on operating performance.
| Metric | Q2 FY26 | Q1 FY26 | Q2 FY25 | QoQ Change | YoY Change |
|---|---|---|---|---|---|
| Revenue (₹ Cr) | 16,676.30 | 16,359.70 | 14,444.50 | +1.94% | +15.45% |
| Employee Cost (₹ Cr) | 376.83 | 346.86 | 285.24 | +8.64% | +32.10% |
| Operating Profit (₹ Cr) | 1,213.65 | 1,299.04 | 1,093.77 | -6.57% | +10.96% |
| OPM % | 7.28% | 7.94% | 7.57% | -66 bps | -29 bps |
| Other Income (₹ Cr) | 19.57 | 19.43 | 33.52 | +0.72% | -41.62% |
| PAT Margin % | 4.11% | 4.72% | 4.57% | -61 bps | -46 bps |
Industry Leadership: Peer Comparison Reveals Valuation Conundrum
Within India's organised retail sector, Avenue Supermarts maintains its position as the largest player by market capitalisation at ₹282,000 crores, dwarfing competitors. However, this leadership position comes with valuation expectations that current operational performance struggles to justify.
The company's return on equity of 12.64% significantly outperforms peers such as V-Mart Retail (5.88%), Shoppers Stop (3.40%), and Vishal Mega Mart (9.87%), demonstrating superior capital efficiency. Only Electronics Mart India approaches comparable ROE levels at 10.43%. This ROE advantage has historically justified Avenue Supermarts' valuation premium, but the recent erosion in margins threatens this fundamental pillar of the investment thesis.
| Company | P/E Ratio | P/BV Ratio | ROE % | Debt/Equity | Div Yield % |
|---|---|---|---|---|---|
| Avenue Supermarts | 103.67 | 13.10 | 12.64 | 0.02 | 0.00 |
| Vishal Mega Mart | 109.35 | 10.80 | 9.87 | 0.14 | 0.00 |
| V-Mart Retail | 141.78 | 8.34 | 5.88 | 0.91 | 0.00 |
| Shoppers Stop | 325.60 | 18.13 | 3.40 | 10.27 | 0.00 |
| Electronics Mart | 49.92 | 3.60 | 10.43 | 1.27 | 0.00 |
At a price-to-book ratio of 13.10x, Avenue Supermarts commands the highest valuation premium among peers (excluding Shoppers Stop's distorted metrics due to poor profitability). This premium reflects investor confidence in the DMart brand, operational execution, and growth runway. However, with a P/E ratio of 103.67x and a PEG ratio of 49.22x, the valuation leaves minimal room for execution missteps or margin disappointments.
Valuation Analysis: Premium Pricing Meets Reality Check
Trading at ₹4,319.70 per share as of October 12, 2025, Avenue Supermarts commands a trailing twelve-month P/E ratio of 103.83x, placing it in the "Very Expensive" category according to historical valuation frameworks. The stock's enterprise value to EBITDA multiple of 61.68x and EV/Sales ratio of 4.57x further underscore the premium valuations.
The price-to-book value of 13.12x represents a substantial premium to the company's book value per share of ₹329.29, reflecting market expectations of sustained high returns on equity and continued growth. However, with ROE at 12.64%, the stock trades at over 8x the underlying return on equity, a ratio that typically signals overvaluation unless accompanied by exceptional growth prospects.
The PEG ratio of 49.22x presents perhaps the most concerning valuation metric, suggesting the stock's growth rate cannot justify current earnings multiples. With five-year sales CAGR of 21.86% and EBIT CAGR of 23.81%, the company has demonstrated strong historical growth, but recent margin pressures and decelerating profit expansion raise questions about sustainability of these growth rates.
The stock currently trades 12.14% below its 52-week high of ₹4,916.30 and 29.44% above its 52-week low of ₹3,337.10, suggesting it remains in the upper half of its recent trading range despite the margin concerns. This positioning indicates the market has not fully repriced the stock for deteriorating fundamentals, potentially leaving further downside risk.
Shareholding Dynamics: Institutional Confidence Wanes
Promoter holding remains rock-solid at 74.65% as of June 2025, unchanged for multiple consecutive quarters, demonstrating the founding Damani family's unwavering commitment to the business. This substantial promoter stake with zero pledging provides governance comfort and alignment of interests with minority shareholders.
However, institutional shareholding patterns reveal emerging concerns. Foreign Institutional Investors increased their stake marginally to 8.25% in June 2025 from 8.18% in March 2025, but this follows a sustained decline from 9.95% in September 2024. The 170 basis points reduction in FII holdings over three quarters signals diminishing foreign investor appetite, likely reflecting valuation concerns and margin pressure worries.
| Shareholder Category | Jun'25 | Mar'25 | Dec'24 | Sep'24 | QoQ Change |
|---|---|---|---|---|---|
| Promoter | 74.65% | 74.65% | 74.65% | 74.65% | 0.00% |
| FII | 8.25% | 8.18% | 8.96% | 9.95% | +0.07% |
| Mutual Funds | 7.37% | 7.63% | 6.77% | 5.95% | -0.26% |
| Insurance | 0.79% | 0.60% | 0.45% | 0.67% | +0.19% |
| Other DII | 1.14% | 0.91% | 0.92% | 0.87% | +0.23% |
| Non-Institutional | 7.80% | 8.03% | 8.25% | 7.91% | -0.23% |
Mutual fund holdings declined to 7.37% in June 2025 from 7.63% in March 2025, representing a 26 basis points reduction. Whilst domestic mutual funds increased their stake from 5.95% in September 2024 to current levels, the recent quarter-on-quarter decline suggests profit booking at elevated valuations rather than sustained accumulation.
Insurance companies and other domestic institutional investors increased their holdings, with insurance rising to 0.79% from 0.60% and other DIIs climbing to 1.14% from 0.91%. However, these increases remain modest in absolute terms and insufficient to offset the broader institutional selling trend. The number of FIIs holding the stock declined to 604 from 607, whilst retail non-institutional holdings decreased to 618,307 shareholders from 671,163, indicating broad-based distribution.
Stock Performance: Momentum Evaporates Amid Volatility
Avenue Supermarts shares have delivered disappointing returns across most timeframes, with the stock declining 6.22% over the past year compared to the Sensex's 1.09% gain, resulting in negative alpha of 7.31 percentage points. The underperformance becomes more pronounced over longer periods, with three-year returns of negative 3.42% compared to the Sensex's 42.26% gain, representing a staggering 45.68 percentage point underperformance.
Recent performance has been particularly weak, with the stock declining 6.70% over the past month whilst the Sensex gained 1.32%, resulting in 8.02 percentage points of underperformance. The one-week return of negative 2.22% against the Sensex's 1.59% gain further underscores the negative momentum, with the stock trading below its 20-day, 50-day, and 100-day moving averages, all technical indicators of weakening price action.
| Period | Stock Return | Sensex Return | Alpha | Assessment |
|---|---|---|---|---|
| 1 Week | -2.22% | +1.59% | -3.81% | Underperformer |
| 1 Month | -6.70% | +1.32% | -8.02% | Weak |
| 3 Months | +3.89% | -0.83% | +4.72% | Outperformer |
| 6 Months | +4.63% | +11.72% | -7.09% | Laggard |
| YTD | +21.29% | +5.58% | +15.71% | Strong |
| 1 Year | -6.22% | +1.09% | -7.31% | Underperformer |
| 3 Years | -3.42% | +42.26% | -45.68% | Severe Lag |
| 5 Years | +109.93% | +103.66% | +6.27% | Modest Alpha |
The year-to-date performance of 21.29% represents the sole bright spot, significantly outpacing the Sensex's 5.58% gain with positive alpha of 15.71 percentage points. However, this outperformance occurred primarily in the first half of the year, with momentum reversing sharply in recent months as margin concerns emerged.
Technical indicators paint a concerning picture, with the stock classified as "Mildly Bullish" after downgrading from "Bullish" on September 30, 2025. The stock trades 3.48% below the level at which the trend changed, suggesting continued weakness. With a beta of 1.00, the stock typically moves in line with the broader market, making the recent underperformance particularly notable and attributable to company-specific concerns rather than sector-wide factors.
"Avenue Supermarts faces a critical juncture: premium valuations demand premium execution, yet operating margins suggest the opposite trajectory."
Investment Thesis: Quality Under Pressure
Avenue Supermarts maintains its "Good" quality rating, a distinction it has held for 31 consecutive quarters since March 2017. This quality assessment reflects the company's market leadership position, zero promoter pledging, strong five-year sales CAGR of 21.86%, and negligible debt burden with a debt-to-equity ratio of 0.01.
The company's average return on capital employed of 16.98% over five years and interest coverage ratio of 45.65x demonstrate robust operational efficiency and financial strength. With ₹355 crores in cash as of March 2025 and zero long-term debt, the balance sheet provides substantial flexibility for continued expansion without financial strain.
However, the financial trend classification of "Flat" as of June 2025 raises concerns, with operating cash flow hitting a low of ₹2,597.31 crores and ROCE declining to 16.82% on a half-yearly basis. These deteriorating metrics suggest the quality foundation, whilst still intact, faces pressure from intensifying competition and operational challenges.
Key Strengths & Risk Factors
✓ KEY STRENGTHS
- Market Leadership: Largest organised retail chain in India with established DMart brand commanding customer loyalty and pricing power
- Fortress Balance Sheet: Zero long-term debt, ₹359 crores net cash position, and debt-to-equity ratio of 0.01 providing expansion flexibility
- Consistent Growth: Five-year sales CAGR of 21.86% and EBIT CAGR of 23.81% demonstrating sustained business expansion
- Superior ROE: Return on equity of 12.64% significantly outperforms retail sector peers, validating operational excellence
- Promoter Commitment: Stable 74.65% promoter holding with zero pledging ensures governance quality and strategic continuity
- Quality Track Record: Maintained "Good" quality rating for 31 consecutive quarters since March 2017
- Cash Generation: Strong operating cash flow of ₹2,462 crores in FY25 funding expansion without external capital
⚠ KEY CONCERNS
- Margin Compression: Operating margin declined to 7.28% from 7.94% QoQ and 7.57% YoY, signalling competitive intensity
- Profit Deceleration: Net profit declined 11.38% QoQ despite 1.94% revenue growth, indicating operational deleverage
- Valuation Extreme: P/E of 103.83x and PEG ratio of 49.22x leave minimal margin of safety for execution disappointments
- Deteriorating Returns: ROCE declined from 16.98% five-year average to 16.53%, suggesting diminishing returns on capital
- Institutional Exodus: FII holdings declined from 9.95% to 8.25% over three quarters, reflecting professional investor concerns
- Technical Weakness: Stock downgraded from "Bullish" to "Mildly Bullish" and trading below key moving averages
- Growth-Valuation Mismatch: Decelerating profit growth fails to justify premium multiples, creating downside risk
Outlook: What Lies Ahead
POSITIVE CATALYSTS
- Store Expansion: Continued new store openings driving revenue growth and market share gains in underpenetrated markets
- Operating Leverage: Potential margin recovery as new stores mature and achieve optimal productivity levels
- Balance Sheet Strength: Zero debt enables aggressive expansion without financial constraints or dilution concerns
- Festive Season: Upcoming Q3 FY26 benefits from festive demand surge typically boosting volumes and margins
- Format Innovation: DMart Ready expansion and omnichannel initiatives potentially opening new revenue streams
RED FLAGS TO MONITOR
- Sustained Margin Decline: Further compression below 7% would signal structural profitability challenges requiring strategic reset
- Market Share Loss: Quick commerce and e-commerce gaining traction in grocery potentially eroding DMart's competitive moat
- Valuation Correction: Any earnings disappointment could trigger sharp derating from current elevated multiples
- Capital Efficiency: Continued ROCE decline would question the wisdom of aggressive capital deployment
- Institutional Selling: Accelerated FII/MF stake reduction would pressure stock price and sentiment
The path forward for Avenue Supermarts hinges on management's ability to reverse margin trends whilst maintaining growth momentum. The company's historical execution excellence and strong brand equity provide reasons for optimism, but the current quarter's results suggest the operating environment has become materially more challenging. Investors must weigh the company's quality credentials against stretched valuations and emerging operational headwinds.
The Verdict: Quality Company, Questionable Entry Point
Score: 58/100
For Fresh Investors: Avoid initiating positions at current valuations. The combination of 103.83x P/E ratio, deteriorating margins, and decelerating profit growth creates unfavourable risk-reward dynamics. Wait for either material valuation correction (target entry below ₹3,800) or sustained margin recovery demonstrating competitive resilience before considering investment.
For Existing Holders: Maintain positions given the company's quality credentials and long-term growth potential in India's organised retail sector. However, consider trimming positions on any rally towards ₹4,600-4,800 to reduce portfolio concentration risk. The margin trajectory over the next 2-3 quarters will be critical in determining whether current holdings should be maintained or reduced further.
Fair Value Estimate: ₹3,600-3,800 (16-20% downside from current levels), based on 85-90x P/E on normalised FY26 earnings assuming 8% operating margins and modest profit growth recovery.
Rationale: Avenue Supermarts remains a high-quality business with market leadership, zero debt, and strong promoter commitment. However, margin compression, decelerating profit growth, and extreme valuations create a challenging setup for fresh investments. The "Hold" rating reflects confidence in long-term fundamentals tempered by near-term execution concerns and valuation risk. The stock requires either operational improvement or price correction to become attractive for accumulation.
⚠️ Investment Disclaimer: This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
