No room for error
Q4FY20 marks one of the first quarters of Avenue Supermarts’ (AVEU) performance miss versus consensus expectations. We see headwinds to AVEU’s revenue growth potential in FY2021 – (1) low inflation (Staples companies unlikely to raise prices given weak demand), (2) lower store throughput (social distancing norms, transport restriction), (3) revival of Kiranas (mom-and-pop stores) – to be further helped by the launch of JioMart, (4) acceleration in adoption of online ordering. Profitability is also likely to be impacted by inferior product mix, higher operational cost (hardship allowance to employees, hygiene and sanitation costs) and negative operating leverage. Although we believe AVEU will benefit from Indian food & grocery retail opportunity, current outperformance (105% vs. Nifty in 1Y) builds in best outcomes. Downgrade to REDUCE.
* Revenue growth decelerated in March:
Revenue / EBITDA / PAT grew 23% / 11% / 41% YoY respectively. Jan and Feb revenue grew 29% YoY while March decelerated significantly to 11% growth. AVEU opened 18 stores during the quarter taking the total store count to 214 and the overall retail space to 7.8 mn sqft. FY21 so far has been weak, with revenue in April down 45% YoY and first half of May increasing 17% over the first half of April.
* Steps taken:
Having discussed the potential difficulties in FY21, we note that the company has shown immense execution capabilities to offset the impact. Steps taken include (1) paying a hardship allowance to its frontline employees (it’s an industry trend), (2) extension of D-Mart Ready home delivery model to 200 stores and (3) introduction of D-Mart on Wheels (DOW) model of supplying products to large housing societies. However, management did highlight that the DOW model was a temporary activity and will be withdrawn once footfalls at stores improve.
* EBITDA margin to remain under pressure in FY21:
EBITDA margin in 4QFY20 declined 70bps to 6.7% due to a weaker GM (-120bps) due to a weaker product mix. We believe that profitability will remain under pressure (estimate 7.6% EBITDA margin in FY21 (-100bps)) driven by (1) weaker product mix, (2) higher cost of hygiene and sanitation activities, (3) higher employee cost (hardship allowance) and (4) negative operating leverage.
* FY20 statistics:
SSG decelerated to 11%, primarily due to (1) slower growth at mature stores (>5 years old) and (2) new stores peaking faster (some even in <2 years, before they qualify for SSG calculations). Bills per store per day remained flat YoY (-1%) but at the same time, average bill value grew 16%. We believe that both these were due to the store closures in March-end and pantry stocking by customers.
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