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EPS cut by 6-4-11.4%, Upgrade to Hold
* FY19 SSG at 17.8% v/s 14.2% in FY18, 21 store additions (24 in FY18)
* Gross margin declined by 100bps in FY19 on conscious strategy to reduce prices on value proposition; Cost of retail in FY19 declined by 30bps YoY
* Looking at fresh issue of 25mn shares, another 25.6mn shares OFS likely to comply with 75% promoter equity by March 2020
We upgrade D’mart from Reduce to hold as 25% decline in share price in the last 5 months has reduced the froth considerably, although absolute returns might lag due to estimated fresh supply of ~Rs62bn in QIP and OFS. Business strategy based on strong clusters and Everyday low prices model continues to playout with 17.8% SSG and acceleration in bills cut growth/store to 10.6%. Margins have been impacted by higher spends behind new store infrastructure. D’Mart has lowered prices across categories led by benefits from higher economies of scale which reinforces its pole position of a value retailer. D’Mart has growth strategy is place led by gradual acceleration in store openings (added 21 stores in FY17, 24 in FY18 and 21 in FY19) and ramp up of D’Mart ready model.
We however cut our FY20-21 EPS estimates by 5.9% and 10.3% following 1) slower rate of store additions with only 21 stores additions in FY19 2) expected dilution of EPS through equity share issue and 3) moderation of PAT growth to 19.3% in FY19 v/s CAGR of 49% over FY15-18.
We expect profit growth to bounce back from FY20 backed by acceleration in store additions and 40bps margin expansion. We estimate 37.4% PAT CAGR over FY19-21. However, valuations at 47.2xFY21 EPS factors in the expected growth. Upgrade to Hold with a target price of Rs1196.
4Q19 Adj. PAT up 21.4%, FY19 SSG at 17.8%:
Net Sales increased 32.1% to Rs 50.3bn. FY19 SSG was at 17.8%. Gross Margins declined 50bps to 14.4% due to conscious strategy to reduce prices across consumer categories. EBIDTA increased 27.9% to Rs3.77bn and EBITDA margins declined 20bps. Cost of retail declined by 20bps YoY led by 20bps lower employee cost. However, Cost of retail increased by 50bps QoQ. Adj. PAT grew by 21.4% Rs2.03bn as finance costs decreased by 7.8% even as depreciation increased 33.2% and tax rate increased 290bps. D’Mart added 12 stores in 4Q (21 stores in FY19) taking the total stores to 176. D’Mart added most stores in established clusters and has not added any new cluster. Maharashtra, Gujarat, Karnataka and Telengana have seen most store additions, while most new clusters started in FY18, have seen no additions.
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