Gradually on path to recovery
* DMart has witnessed sequential revenue recovery (up 37% QoQ) with consistent MoM growth in 2QFY21. However, numbers are still weak YoY (down 11%) with -12.5% SSSG.
* Gross Margin has improved, but is still down 90bp YoY due to lower mix of the margin-accretive discretionary business.
* DMart added six stores in 2QFY21 despite the economic headwinds. We have marginally tweaked our numbers for FY21E/FY22E, factoring in 2%/41% revenue growth and EBITDA growth of -13%/59%, which reflects gradual recovery from 3QFY21.
Sales recovery continues; Discretionary business still down
* DMart’s revenue declined 11% YoY (in-line) to INR53b with SSSG at -12.5%. However, its business is improving MoM with unlock in progress. While FMCG and staples have recovered, discretionary consumption is seeing encouraging trends, though down YoY
* Gross margin has recovered 30bp QoQ as sale of margin-accretive general merchandise and apparel categories are improving. However, it is still down 90bp YoY (50bp below expectation), which has dragged gross profit by 16% YoY to INR7.7b.
* EBITDA, thus, came in at INR3.3b falling 36% YoY (in-line) with margins recovering to 6.2% (+330bp QoQ, -240bp YoY). PAT came in at INR2b, dropping 39% YoY (15% beat), cushioned by other income.
Strong focus on store addition, capex continues
* Overall sales improved MoM during the quarter, as since Aug’20 most stores are operating at pre-COVID operating hours. In Sep’20, sales of FMCG and staples at all stores exceeded YoY. Sales of general merchandise and apparel (discretionary category) is still sluggish at 22.7% of revenue v/s usual contribution of 27.3%, but sales trend is encouraging.
* Stores older than two years recorded 12.5% drop in SSSG. Though footfalls are lower than pre-COVID levels and basket values are higher, both are moving toward pre-COVID levels.
* Capex during 1HFY21 was strong at INR6.5b despite the lockdown (v/s 1HFY20 capex of INR7.7b), which can be attributed to the opening of eight new stores. Of this, six stores were added in 2QFY21.
* Inventory remained stable at INR19b. However, inventory days jumped from 38 to 45 days due to the falling revenues. DMart remains debt free with cash of INR30b, including QIP of INR40b in the last fiscal.
Valuation and view
* We expect DMart to deliver FY20-22E revenue/EBITDA CAGR of 20%/18%. We have factored in -7%/15% SSSG and 15/40 store adds for FY21/22E. Unlike other retailers, grocery retailers catering to essentials have seen swift recovery from COVID-19. We believe the gradual unlocking of the nation would lead to positive sales from 3QFY21, supported by improving sales from the general merchandise and apparel category.
* The company’s INR40b equity funding in 4QFY20 has strengthened its balance sheet. DMart had net cash position of INR30b in 2QFY21, which enhances its liquidity in such uncertain times.
* We value DMart at FY22E EV/EBITDA multiple of 45x (72x P/E), with a TP of INR2,100 (v/s INR2,000 earlier). The recent price correction, expectation of swift recovery post COVID-19 and its continued cost/price competitiveness should hold the company in good stead.
* However, growing scale of online retailers with strong sales in recent months and the prominence of players like Amazon and Reliance Retail with deep pockets poses risk of moderation in DMart’s growth and return profile, which may in turn restrict re-rating. Thus, we value DMart at ~20% discount to its three-year average EV/EBITDA multiple of 54x, implying 6% upside. We retain our Neutral recommendation.
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