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Strong performance, Accumulate for long term
* 8 store additions in 1QFY20, due to spillover of FY19
* Gross Margins up 50bps despite stated strategy to reduce prices across consumer categories. 1Q gross margins not a reflection of full year’s margin
* Cost of retail declined by 55bps YoY, 113bps QoQ
* OFS and QIP (Approx. Rs62bn), remains an overhang on the stock
D’Mart has sustained strong sales momentum led by Everyday low price model, strong value proposition and clusters based strategy. D’Mart has added 8 stores in 1Q20, however large part of store openings are a spillover of FY19. Though 1Q20 gross margins were higher, we believe it will normalize in the coming quarters. It continues to maintain its growth strategy of gradual acceleration in store openings (added 21 stores in FY17, 24 in FY18 and 21 in FY19) and strong throughput in stores.
We believe benefits of higher store openings in 1Q boosted sales while 40bps margin expansion was led by operating leverage. We estimate 37.4% PAT CAGR over FY19-21. However, valuations at 49.8xFY21 EPS factor in the expected growth. Maintain Hold with a target price of Rs1338 although absolute returns might be back ended due to estimated fresh supply of ~Rs62bn in QIP and OFS by March2020.
1Q20 reports strong sales momentum:
Net Sales increased 26.8% to Rs57.8bn. Gross margins at 16.1% increased 50bps on conscious strategy to reduce prices across consumer categories. 1Q gross margins are usually not a reflection of full year’s margin. EBIDTA increased 41% to Rs5.96bn. Cost of retail declined by 55bps YoY (113bps QoQ) led by 10bps and 50bps decline in employee cost and overheads. Adj. PAT grew at 33.8% to Rs3.35bn as tax rates declined by 14bps despite increase in Interest cost and depreciation by 67.3% and 85.9% and decrease in other income by 16.2%. Adj PAT increased 33.8% to Rs3.35bn.
IND AS Impact on PAT limited, store openings accelerate:
Impact of IndAS 116 has led to overstatement of EBITDA by Rs191mn and understatement of PBT by 36.1mn. Ignoring the changes, comparable EBITDA would have grown 36.5% to Rs5.8bn and Adj. PAT would have grown 34.7% to Rs3.38bn. D’Mart added 8 stores in 1Q taking the total stores to 184 stores.
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