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Growth prospects strong, but margin headwinds blowing fiercely
DMart hosted its annual analyst meet. Key takeaways:
* Management indicated that it is looking at accelerating store addition (v/s 21 in FY19) and that it is open to further explore the lease model to reduce the capex intensity (capex/sq.ft. up 2.5x over FY16-19). We expect 24 store adds and 26% revenue CAGR over FY19-21.
* The company acknowledged that its price value arbitrage versus peers has reduced due to intensifying competition. However, it would put in all efforts to keep a check on input costs, such that it translates into low prices. This is DMart’s biggest advantage, in our view.
* Intensifying price competition, higher capex toward new stores and upcoming lease cost will continue exerting pressure on the profit margin. We expect flattish EBITDA/PAT margin in FY20/21, with 28% PAT CAGR.
* Globally, offline retailer costs are lower than online, indicating limited threat on that front. However, cognizant of the online threat, the company has entered the ecommerce space with its DMart Ready stores (although this format is still in the infancy stage). Also, the ‘cash and carry’ business is in the planning stage.
* The stock is richly valued at EV/EBITDA and P/E of 31x and 56x, respectively, on FY21E, factoring in 28% PAT CAGR over FY19-21 (still much below 55% during its heydays over FY15-18, which is not fully captured in its valuations). We, thus, maintain our Sell rating on the stock with a target price of INR1,115.
Store addition to accelerate, but with caveats
Management acknowledged that the company needs to accelerate the pace of store addition (v/s 21 stores in FY19), moving away from its conservative culture. It is also open to lease-based stores (even though there has been limited traction over the past few years), which, in our view, should help it to reduce costs (capex/sq.ft. up >3.5x since FY16 and thus capex up 2.4x, despite the pace of store adds remaining the same).
SSG expectations modest; pricing pressure persists
Even as the mix of new stores (40% stores are three years old) allows DMart to garner double-digit SSSG (the best in the industry), it has modest expectation of beating inflation in the long run – and this will happen only over time. Price competition remains intensified as the value arbitrage against peers is shrinking, according to management. Against this backdrop, the focus is to ensure that its input cost remains the lowest, which would allow it to fight any rational or irrational competition. This remains its biggest competitive edge in the prevailing competitive market. However, the company indicated that its pricing would never be above peers as it focuses on value retail instead of convenience. This would leave room for further price cuts
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