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Sales velocity near peak
While D-MART posted healthy growth in 3Q, the pace of growth has come off consistently over 9MFY20 courtesy 1. A heavier base, 2. Ever-heightening competitive intensity. What is more worrying is the dip in the anchor variable - sales velocity (revenue per sq. ft) over the last 9m partly due to larger-sized stores. This certainly warrants a closer look to assess how close is D-MART to its peak on throughput, cost and working capital efficiencies.
HIGHLIGHTS FOR THE QUARTER
* Growth remains healthy, but pace comes off: Revenue grew 23.9% YoY to Rs 67.5bn (1% lower than est). Bulk of the growth was SSSG-led (est: SSSG 13.5%).
* Store expansion picks up, stores getting bigger: D-MART added 7/20 stores in 3Q/9MFY20 (vs. 4/9 stores in 3Q/9MFY19). Consequently, we too revise our estimates of store adds upwards to 32 (27 earlier). Stores are getting bigger too. The incremental store size is as high as 52k sq.ft vs company avg of ~34k.
* Sales velocity seems nearing peak: Revenue per sq. ft has consistently dipped over 9MFY20 (-2.6% to ~36.2k sq ft) - largely a function of bigger store sizes. However, even on a per store basis, throughput seems to have just about mimicked inflation at Rs 1.38bn/store. (up 3.6/5% over 3Q/9MFY20). Assuming, this growth comes from bill sizes as basket volume doesn’t change materially over a short span, bill cuts per store may have remained largely at FY19 levels. (~1mn bill cuts/store).
* Meanwhile, cost of retailing inching up: Gross margins improved 31bp to 15% (HDFC est: 15.2%), while LTL EBITDA margins improved 16bp only to 8.7% (in-line), implying that cost of retailing is gradually inching up (even for the standalone operations; it’s up 33bp in 9MFY20). We believe cost of retailing for consolidated operations would be even higher as D-MART Ready remains in investment mode.
We remain sellers on the counter as we believe
1) D-MART's throughput, cost and working capital efficiencies are near peak.
2) Cost of retailing is inching up.
3) Well capitalized egrocers/online biggies (Amazon /Flipkart) are getting pricewar-ready as can be seen from the significant bump up in their authorized capital. (This could increase cost of retailing in general for the industry over the medium to long term as offline retailers may be arm-twisted into taking fulfillment cost on their books – not factored in). We largely maintain our estimates/TP and we bake Revenue/EBITDA/LTL APAT CAGR of 26/30/30% CAGR over FY19-22 and currently have a DCF-based TP of Rs. 1,250/sh, implying 24x Dec-21 EV/EBITDA. Stock currently trades at 42/34x FY21/F22 EV/EBITDA.
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