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Deceleration in earnings growth to put pressure on valuation
* Cost pressure continues to restrict earnings growth:
Standalone revenue surged 32% YoY to INR50.3b (in-line) on robust store additions (12 stores v/s +14 stores in 4QFY18/est.) coupled with strong SSSG. Despite strong revenue growth, pressure on gross margin (GM) continued. GM contracted 50bp YoY to 14.4% (-30bp QoQ), potentially due to the company’s recent focus on price competitiveness. EBITDA margins contracted 25bp YoY as the drop in GM was partly offset by operating leverage benefits. PAT grew 20% YoY (9% miss) to INR2b, as EBITDA growth was partly offset by 33% YoY increase in depreciation cost. For FY19, consol. revenue/EBITDA/PAT grew 33%/21%/12% YoY with 21 store additions, taking the total store count to 176.
* Risk of decelerating earnings growth:
DMART's pace of footprint addition in FY19 slowed to 14% v/s the high-teens growth seen in the last 2-3 years. FY19 SSSG, however, expanded 360bp to 17.8% (v/s 14.2% in FY18; est. of 20%). Capex/sqft has also consistently inched up from ~INR7000-8000/sqft from 3-4 years ago to over INR12,000/sqft. These factors may restrict the pace of revenue growth, as well as put pressure on FCF and the return profile. Further, margins may remain under check given the hyper competitive market scenario. Thus, we cut EBITDA margin for FY20/21 by ~40bp and PAT estimate by 4-5%.
* Valuations and view:
DMART has approved issuance of 25m equity shares (QIP placement), in order to achieve minimum public shareholding. This is expected to generate INR31b (at CMP), which should assist in meeting the increasing capex requirements, but could dilute EPS by 4%. We cut TP to INR1,125 (prior: INR1,300) on cut in earnings and multiple, ascribing 26x EV/EBITDA on FY21E; a 20% premium to the target multiple of our coverage companies given its strong execution capability and healthy earnings profile. However, given the risk of earnings deceleration and rich valuation, we believe, the stock should come under pressure. Maintain Sell.
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