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Offline business making quick recovery, increased efforts on online; rich valuations to limit upside

Result Highlights

* Result summary ‐ Overall weak quarter with both revenue and margins impacted by lower operational hours during the quarter but traction is building up on all fronts with operations and inventory normalizing, supply chain stable and construction activity resuming. Revenue/EBITDA/PAT growth of 31%/103%/132% respectively.

* Topline ‐ Revenue up 31% yoy to Rs 50.3bn on a low base (Still about 19% below 1QFY20 levels) despite much lesser hours of operations led by higher footfalls given lesser restrictions on personal mobility. 22 new stores opened post 1QFY21 also contributed to increased sales.

* Margins ‐ Gross margins came in at 12.4% (13.7% last year) given the inferior mix and higher discounts while EBITDA margins were impacted sharply due to negative operating leverage coming in at 4.4% (2.8% last year).

* Current sales trends ‐ 2 yr older stores doing 91% of normal sales in 2nd half of June, doing higher than pre‐pandemic sales in states where regulations have been eased in terms of operating hours, overall numbers distorted due to restrictions in Maharashtra.

* Online business ‐ E‐commerce business saw revenue growth of 123% to Rs 791cr with EBITDA losses reducing from Rs 41cr to Rs 29cr with strong cost controls.

* Store expansion – Opened 22 stores in FY21, guidance of at least 37 stores in FY22.

Valuation and view

The 1Q performance was quite soft due to operational restrictions further distorted by delayed easing in key state Maharashtra.   But the recovery rate of reopened stores is quite strong indicating no structural issues for the modern trade channel. Further, inventory normalization and confidence on opening 37 plus stores in FY22 should allay growth and inventory write‐off concerns. While efforts have increased on scaling up the online business DMart Ready, the company still wants to wait out for a couple more years to see profitable growth in Mumbai before a rapid national scale‐up. The management sees enough potential for growth for offline modern trade space despite rising competition from alternate channels like online, GT etc. with potential of having 1,200 stores in its current 96 cities. The company remains focused on its solid execution, supply chain and low cost structure to continue delivering best value for money to consumers, with inflation being an additional tailwind. We continue to believe in the scalability of the model and see a long growth runway for the company which should help it sustain premium valuations. We model in revenue/PAT CAGR of 34%/43% over FY24E, the highest growth in the large cap consumption space. Given limited absolute upside, we reiterate our ADD rating with a PT of Rs 3,820 based on 50x FY24E EV/EBITDA, implying 78x FY24 P/E.

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