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Store adds strong, but slowing SSSG to impact return profile
* DMART delivered another strong quarter in a consumption slowdown context, albeit with an inline but a decelerating revenue growth print. High capex and moderating revenue growth could crimp return ratios and compress the stretched valuation multiples. Retain SELL with unchanged estimates.
Slowing growth but margin reset cycle behind
* DMART’s standalone 3QFY20 revenue/EBITDA/PAT grew 24%/26%/55% YoY to INR67.5b/INR5.7b/INR4b (pre IND-AS 116 basis). 9MFY20 revenue/EBITDA/PAT grew 24%/30%/47%.
* Footprint addition was a healthy 9% YoY in 3QFY20; the company added 7 stores/0.47m sqft to reach a total of 196 stores/6.97m sqft area. 9MFY20 saw addition of 20 stores (v/s est. 26 stores for FY20).
* Revenue growth came in at 24% each for 3QFY20/9MFY20, but has slowed considerably compared to 33% each in the corresponding period. For 9MFY20, our same store sales growth (SSSG) estimate was in low doubledigit (v/s 18% in FY19).
* Gross profit was up 26% YoY at INR10.1b (in-line). Gross margin expanded 30bp YoY to 15% (10bp below est.). EBITDA at INR5.7b grew 26% YoY (inline) while EBITDA margin expanded 20bp to 8.5%. PAT grew 55% YoY at INR4b (7.6% beat) due to the lower tax rate.
Strong store adds to push growth, but ownership model may expand BS
* Although DMART’s pace of store addition remains healthy, weak consumer demand is evident from the slowing SSSG, which could drag earnings.
* Additionally, we expect stable margins with limited room for operating leverage due to (a) slowing SSSG, and (b) passing on of cost efficiencies to maintain its competitive position.
* Our FY20/FY21/FY22 revenue growth estimate stands at 24%/31%/22% to INR248b/INR326b/INR398b while our EBITDA growth estimates for the same period stand at 29%/32%/20% to INR21b/INR28b/INR34b.
* DMART's capex/sqft has increased continuously in the last 4 years and has doubled to ~INR12,000/sqft, which along with slowing SSSG could impact its return profile.
Valuation and view
* DMART’s robust execution on core Retail operating parameters in an environment of consumption slowdown is quite impressive and demonstrates the superiority of its business model.
* Its consistent superlative performance has ensured strong valuation rerating in the last three years since its listing and resulted in massive outperformance vs. market and other Retail peers. Therefore, the relative moderation in revenue growth coupled with high capex could impact DMART’s return ratios and could compress valuation multiples in our view, despite its continued stellar relative earnings outperformance .
* Valuations at 54x FY22 P/E and ~35x FY22 EV/EBTTDA are expensive and provides no margin of safety. Maintain SELL with TP of INR 1700.
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