4Q performance was certainly un-DMARTesque as one would’ve hoped DMART to benefit from excessive hoarding of essentials by consumers during the COVID19-led lockdown. Alas, top-line grew 23% YoY in 4Q (11% YoY in March-20) to Rs. 61.9bn. Bigger disappointment was on the gross margin front (13.2% vs HSIE: 14.1%) as skew of lower margin Food/Non-Food FMCG increased by 670bp to 77.7% (implied) in 4Q. (Signficantly high given just 9 days of lockdown), Adj. EBITDA grew 4.7% to Rs. 3.94bn (vs HSIE: Rs. 4.37bn) as lower GM impact trickled down the P&L. Despite this, APAT grew 43% YoY to Rs. 2.9bn (in-line; on higher other income/lower tax-outgo). Cash position remains the strongest in class (QIP-led) and WC cycle has inched up. Valuation & View: GMs/EBITDAM are likely to remain under pressure as essentials remain high in revenue mix till June-end (Per channel checks). To add to the woes, DMART may also have to contend with rising cost of retailing as 1. Contract labour comes at a premium and 2. Lower margin DMART Ready sales may inch up during the pandemic. We have cut our FY21 EPS by 11% to factor in lower GMs, we largely maintain FY22 estimates and our SELL recommendation with a DCF-based TP of Rs. 1,750/sh, implying ~35x FY22 EV/EBITDA. Stock currently trades at 77/52x FY21/F22 EV/EBITDA
* Top-line disappoints in stock-up heavy quarter, sales velocity declines: Revenue grew 23% YoY to Rs 61.9bn (vs. HSIE: Rs. 63.9bn). Bulk of the growth was expansion-led. D-MART added 38/18 stores YoY/QoQ in 4Q. (Store count: 214). SSSG came off significantly to 10.9% in FY20 (HSIE: 11% YoY). Mar-20 sales grew at 11% YoY - significantly lower than the run-rate D-MART is used to; especially within the context of a stock-up heavy month. Revenue decline in Apr-20 is even steeper (-45%) as nearly 50% of stores remained closed and the rest operated for restricted hours. Revenue per sq. ft declined by 2/7.7% in 4QFY20/ FY20 to Rs. 33.4k/32.9k resp.
* Margins negatively surprise too: GMs contracted 118bp YoY to 13.2% (HSIE: 14.1%) as revenue mix deteriorated courtesy the lockdown. What is surprising is the extent of deterioration! Lower margin Food/Non-Food FMCG’s skew increased by 670bp to 77.7% (implied) in 4Q despite just 9 days of lockdown. We suspect the quality of revenue mix to have deteriorated in Jan/Feb too. This, gives an inkling of the margin pain to follow in 1QFY21. Ergo, we’ve cut our GM/EBITDAM assumptions for FY21 by 70bp each.
* Cost of retailing stable for now, but to inch up: 4QFY20/FY20 cost of retailing at 6.9/6.6% resp. remains stable for now. However, this is likely to inch up as 1. Contract labour to come at a premium and 2. Lower margin DMART Ready sales may inch up during the pandemic. Mgt. also highlighted that large EBITDA declines are expected due to lower sales, lower GM and higher cost of operations on account of hardship allowance to front line staff and higher personal hygiene/store sanitation costs
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