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D-Mart – Analyst Meet

Build few things, but build them well DMart had a marathon analyst meet, which, in summary, was a reiteration of its simple approach to profitable growth. It provided detailed management insights on footprint expansion, its e-commerce strategy, the DMart Ready approach, and other areas – such as recovery from COVID, the private label opportunity, and the reiteration of its low-cost low-pricing model.

Enough firepower for growth

DMart reiterated its stance of 35–37 store adds in the current fiscal and emphasized that neither capital nor opportunity is in dearth for footprint expansion. The present conducive Real Estate market would continue to support accelerated store additions. With the opportunity to put up a store for every area with 100k population and the large untapped opportunity in the eastern region, the scope for store additions remains huge. Recovery from COVID has been swift, with strong pent-up demand in the Discretionary category, supporting the shift from the unorganized market. Thus, we believe a 15% footprint addition is achievable.

Not in a hurry to lap up online flurry

Despite the repeated questions on DMart’s perceived lower aggression in ecommerce, the management categorically gave three key messages. a.) The management understands the huge potential in online grocery, and customer behavior is encouraging, but this is a long runway and not a rat race. b.) DMart is clear that unless it has created a profitable and scalable online model through DMart Ready, it would not expand across markets.

It is getting closer to achieving profitability in this model but may wait and observe 1–2 years of performance in a post-COVID environment. c.) Regardless of the perception, DMart Ready is aggressively ramping up the online channel in the cities wherein it has commenced operations, which is evident from its top 2 position in a top city such as Mumbai. In our view, the Online Grocery market – which has grown 6–7x to reach INR4–5b in the last 3–4 years – is certainly becoming a strong force in the Organized Grocery market, and DMart may have to move quickly.

Margin profile to be maintained

DMart reiterated that a 15% gross margin and a competitive cost structure would allow it to maintain its EBITDA margin, unless the market competitiveness intensifies – which it could respond to swiftly given its agile processes and efficient cost structure. It has increased focus on the private label, which is a welcome positive, and looks at this not only as a mere margin lever but also a vehicle to increase customer breadth.

Key takeaways from call

* It is seeing strong pent-up demand in the Non-Discretionary category; therefore, once store restrictions are lifted, growth is likely to accelerate.

* The pace of store additions would continue to accelerate as there is limited revenue cannibalization of online with offline

* It could be equally competitive in online, but does want to burn cash like other online players. It would accelerate scale post COVID, once the model turns profitable.

* The increase in inventory in the last quarter has been reversed and is not a concern anymore.

Valuation and view

* We expect DMART to deliver an FY20–23E revenue/PAT CAGR of 24% each, factoring in 30/40 store additions and ~50% SSSG in FY22E/FY23E. Unlike other retailers, grocery retailers such as DMART have seen swift recovery since the lifting of COVID-related restrictions as well as healthy margin improvement.

* The stock is trading at rich valuations (55.6x FY23E EV/EBITDA and 87.9x FY23E P/E).

* (a) Expensive valuations, (b) the risk of growth moderation owing to strong traction for online retailers in a post-COVID world, and (c) the presence of deeppocketed players such as Amazon and Reliance Retail restrict the near-term upside.

* We value DMART at 52x FY23E EV/EBITDA (around its average multiple of ~57x). We retain our Neutral rating and TP of INR3,220 per share.

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