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Strong recovery in the quarter but multiple headwinds ahead; keep adding on dips

Result Highlights

* Revenue growth trajectory continued to improve from the lows of 1QFY21 with 17.9% yoy growth despite operational disruptions starting March 2021, helped by recovery in footfalls and 20 new store openings in FY21 (13 stores opened in 4Q). The online business DMart Ready, now in 4 cities besides MMR region posted a 74% growth.

* Gross margins improved 120bps yoy to 14.4% led by recovery in sales of high‐ margin general merchandise which resulted in EBITDA margin improvement of 170bps to 8.4% helped by continuation of strong cost controls.

* Our calculated revenue per st ft was up 4% and EBITDA per sq ft up 31% yoy.

* Positive margin surprise led to strong earnings performance with 51.6% PAT growth.

* Management highlighted the adverse ongoing impact on operations since late‐ March with more than 80% of its network facing severe operational constraints, which are expected to continue till the vaccination rate picks up significantly.

* With no significant supply chain disruptions, there is risk of excess inventory piling up as the company had planned optimistically before the second wave struck.

* Construction of new stores for FY22 might not see much impact as labor migration has not happened like last year, albeit some delays cannot be ruled out.

Valuation and view –

The 4Q performance was a positive surprise especially on the margin front as demand for discretionary goods made a strong recovery and demand momentum continued from 3Q.  But given the second wave of the pandemic, there are multiple near‐term headwinds for the company to contend with regards to store operations, inventory liquidation and new store construction.

In this environment, the company’s strong cash‐rich balance sheet will not only help it tide over this difficult period, but also help in accelerating its offline and online footprint expansion despite lower throughput and cash flows. We continue to like DMART for its best‐in‐class execution, lowest cost of retail, aggressive expansion plans, industry leading asset and inventory turnover and high customer conversion and loyalty given its EDLP model, albeit we would have been happier with more and faster growth in its online presence.

While near‐term risks to FY22 earnings remain, we believe in the scalability of the model and therefore see a long growth runway for the company which should help it sustain premium valuations. We model in revenue/PAT CAGR of 33%/50% over FY21‐23E, the highest growth in the large cap consumption space. We assume coverage with an ADD rating with a PT of Rs 3,205 based on 55x FY23E EV/EBITDA, implying 84x FY23 P/E

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