Published on 3/06/2020 1:23:26 PM | Source: Motilal Oswal Financial Securities Ltd

Sell Avenue Supermarts Ltd For Target Rs. 1,900 - Motilal Oswal

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* COVID-19 impacts store operations, hurts earnings; cut estimates

* 10.9% SSSG and a strong 18 store additions drove 24% YoY revenue growth (inline) in FY20. However, the company reported a big 22% miss on EBITDA with 4% YoY growth.

* We have cut our EBITDA estimate by 16.8% for FY21E due to 50% of stores being closed over Apr–May’20, lower gross margins from increased nondiscretionary revenue, and higher opex. However, we maintained our FY22E EBITDA estimates given the sharp recovery expectation as it pertains to nondiscretionary


* Gross margin pressure and higher opex drag down EBITDA

* DMART’s consolidated revenue grew 24% YoY to INR63b (down 8% QoQ, 4% above est.) on account of sales of only essential products at DMART stores. In Mar’20, revenues grew only 11% YoY (v/s Mar’19) due to the lockdown effect witnessed in the nine days of Mar’20. Hence, implied revenue growth over Jan–Feb’20 is ~30%.

* For FY20, revenue/EBITDA grew 24%/8.1% to INR249b/INR20.2b with flat EBITDA margin at 8.1%. Also, PBT increased by 24% to INR17.7b while PAT clocked growth of 46% to INR13.2b on the back of lower taxes.

* Gross margins dropped ~110bps YoY to 13.6% due to the closure of the Apparel and General Merchandise category sales.

* Other expenses were higher at 21% YoY to INR3.4b on account of a large number of store adds (v/s expectation) and increased cost of sanitization and preventive measures. Furthermore, employee cost was up 37% YoY (6.5% QoQ) to INR1.3b (in-line).

* Subsequently, EBITDA on a pre-Ind-AS 116 basis grew 4% YoY to INR3.9b (22% below est.), with margin contraction of 120bps to 6.2%.

* PBT grew 12% YoY to INR3.4b (20% miss), primarily on account of higher other income (3.5x growth to INR349m), which increased due to QIP of INR40b. Due to this and lower tax, PAT grew 48% YoY to INR2.8b (a 17% miss).


Strong store adds, while SSSG slows

* DMART added 18 stores in 4QFY20, taking the total store count to 214 stores. In FY20, DMART added 38 stores v/s 21 in FY19. In FY21, we expect lower store adds given the environment, while in FY22, this should once again gather pace with 45 store adds.

* DMART reported SSSG of 10.9% in FY20. This lower SSSG was attributed to: a) lower incremental revenue growth from stores older than five years and b) the early realization of peak sales in new stores opened (before they have qualified the criteria of 24 months for the SSSG measurement).

* The company reported a 45% YoY drop in Apr’20 sales as more than half of the stores remained closed or operated under timing restrictions. However, post certain relaxations, in May’20, revenue has grown 17% MoM for the first 14 days.

* Capex for FY20 stood at INR17b. The company has reached net cash position at INR32.4b (including FD, accounted for in non-current financial assets) post QIP of INR40b.


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