Sell Avenue Supermarts Ltd For Target Rs. 2,160 - HDFC Securities
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Finally hits growth!
D-MART finally hits the growth phase (after a disappointing 1HFY21). The grocer clocked a healthy 10% topline growth (HSIE: 8.5%). While gross margin delivery was strong (15.1% vs HSIE: 14.8%), its underpinnings remain weak (on the back of lower discounting in staples). Non-essential sales remain weak. EBITDAM expanded 52/256bp YoY/QoQ to 9.3% courtesy strong cost control. (HSIE: 9%). While we increase our FY22/23 EPS estimates by 5-6% resp. to account for marginally higher revenue/sq. ft, we downgrade the stock to Sell (Earlier Reduce) as the recent run-up leaves no room for an investment case (DCF-based TP: 2,160/sh – implying 34x FY23 EV/EBITDA + 2x FY23 sales for e-comm business).
* 3QFY21 highlights:
Revenue grew 10.1% to Rs. 74.3bn (HSIE: Rs.73.3bn) as footfalls continued to recover from the wrath of COVID-19. While GM expanded to 11/189bp YoY/QoQ to 15.1% (HSIE: 14.8%), its underpinnings remain weak. We suspect lower discounting levels in staples (200-400bp lower) continue to cushion the adverse margin impact of lower non-essential sales. Management, too, highlighted that recovery in OOH categories remains weak. EBITDAM expanded 52/256bp YoY/QoQ to 9.3%, courtesy strong cost control (HSIE: 9%). DMART added 1 store in 3Q (now: 221 stores). >/=2-year-old stores (162) have hit 96% of Dec-19 sales. Non-FMCG supplies remain inconsistent and RM prices are also inching up; hence, inferior sales mix and margin pressure can’t be ruled out in the near term.
* Outlook:
While DMART remains best-placed within the peer set to carve out a recovery, it’s still not out of the woods. An extended slump in nonessential sales could mean that discounting in staples will be lower, thereby opening up the space for competition. This, coupled with punchy valuations (FY23 P/E: 75x+), leaves no margin of safety/error for the investor and the business. We downgrade the stock to Sell with a DCF-based TP of Rs. 2,160/sh, implying 34x FY23 EV/EBITDA for std biz + 2x sales for e-comm business).
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