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Benefit of recent expansion yet to fully kick in

DMart’s 1Q revenue performance was decent with ramp up of new stores. However, it was slightly underwhelming as sales per sq. ft. was still below pre-covid levels despite near-normal operating conditions plus significant commodity inflation (traders/retailers are "assumed" to be beneficiaries). Gross margin print of 15.8% was slightly below pre-covid levels – weak recovery in fashion and general merchandise continues to weigh on both revenue and margins, in our opinion. EBITDA margins was back to pre-covid levels driven by operating leverage.

In FY22-24E, we believe it has value and volume tailwinds: (1) inflation (higher absolute gross profit per unit, operating leverage) and (2) likely higher footfalls as more number of consumers prioritise value (read lower prices in the trading area). Furthermore, we believe it will look to accelerate store expansion and the benefit of recent expansion is yet to fully kick in – revenue intensity is lower than pre-Covid levels. Downgrade to ADD from BUY; TP Rs4,200

* 1QFY23 - revenue growth led by ramp up of new stores: Revenue / EBITDA / PAT grew 95% / 356% / 490% YoY, respectively. On a 3-year CAGR basis, revenue. EBITDA and PAT growth was 19%, 19% and 27%, respectively. Revenue growth was driven by ramp up of 110 new stores opened over last 3 years which had their first normalised operating conditions after last couple of years of disruptions. However, sales per sq. ft. for the quarter was still lower by ~12% as compared to 1QFY20. We believe the benefit of recent store expansion is yet to fully klick in. Management highlighted that general merchandise and apparel witnessed relatively better demand than previous quarters but is still not back to pre-covid levels as discretionary categories are impacted (high inflation led pricing hides the stress on volume growth) due to inflationary impact on consumers. DMart Ready continued to scale-up well with 53% YoY revenue growth while expanding its presence in 12 cities with focus on larger cities

* Store addition: DMart added 10 stores in the quarter, taking its total store count to 294 (12.1mn sq. ft.). DMart seems to be adding stores of larger sizes – as per our math, the average size of new stores is ~60,000 sq. ft. versus overall average of ~41,200 sq. ft.

* EBITDA margin back to pre-covid levels: Gross margin was down ~30bps vs 1QFY20 at 15.8% (1QFY22: 12.4%). As highlighted above, a relatively weak mix continued to impact the gross margin print. Secondly, DMart intends to drive efficiency gains in procurement and also make assortment sharper (amidst the current inflationary times). EBITDA margin was similar to 1QFY20 at 10.3% (1QFY22: 4.4%).

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