Coupe 1Q; a consumer beneficiary seeking value and inflation pass-through in fiscal years 21-23e
DMart’s first quarter revenue performance was decent against the backdrop of tight operating restrictions. However, a decline in gross margin of around 130 basis points year-on-year was of concern given that the sales mix would have been broadly comparable (low general merchandise); The expansion of the EBITDA margin was driven by operating leverage. During FY22 and beyond, we believe it will benefit (1) from the relevance (to the consumer) of the value-for-money positioning, which we believe can potentially be a more competitive advantage. important during FY22-23E and (2) focused on price leveraging operating (beneficiary of commodity inflation, FMCG). The recovery in general merchandise and clothing is also expected to be rapid (similar to last year as well). The extremely expensive valuations limit our will to have a constructive vision; the share is now trading at 85x P / E and 58x EV / EBIDTA on FY2023E. REDUCE rating stays (TP Rs3,000).
– Revenue growth driven by better mobility: Revenue / EBITDA / PAT increased by 31% / 103% / 132% respectively year on year. This performance was driven by better mobility compared to the base quarter (1QFY20) even though the restrictions on store operations were more severe this time (store hours had to be hidden despite the essential classification). We note that in the second wave, restrictions on the movement of people for non-essential purposes were softer (compared to the same period last year), which facilitated mobility in general. However, on a sequential basis, the revenue impact was visible with revenue down 31% QoQ. Interestingly, management said a store needed 45 days of unhindered uptime to get back to pre-Covid sales momentum.
– Margin expansion driven by leverage despite the weakness of GMs: gross margin contracted 130bp year-on-year to 12.4%; in QoQ, margins fell by 200bp. We note that this is the lowest gross margin ever recorded. Although limited sales of general merchandise would have continued to affect margins, the contraction (year-on-year) is strong. We believe that the benefit of rising commodity and FMCG prices is not yet visible in the margins. Nonetheless, the EBITDA margin increased 160 basis points year-on-year to 4.4%, mainly due to operational leverage.
– Other highlights: 1) Opening of 4 new stores in the first quarter (22 in the last year) adding 0.2 million square feet of retail space; it now has 238 stores with a retail space of 9.0 million square feet, 2) Construction activity has started at all sites, 3) The easing of lockdowns in several cities is contributing to a better attendance.
– Valuation and risks: Our profit estimates are largely unchanged for FY23; we are now modeling revenue / EBITDA / CAGR PAT of 35% / 48% / 49% on FY21-23E. Maintain REDUCE with a revised target price based on the DCF of 3,000 rupees. The main upside risks are the rapid recovery in e-commerce operations and lower than expected competitive intensity.
Shares of Avenue Supermarts Ltd were last trading in BSE at Rs. 3347.05 from the previous close of Rs. 3378.95. The total number of shares traded during the day was 109,734 in more than 7,769 transactions.
The stock hit an intraday high of Rs. 3,399 and an intraday low of 3,311.7. The net turnover during the day was Rs. 369 268 861.