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Expect growth to bottom out

* Avenue Supermarts (DMART)’s 1QFY24 revenue was up 18% YoY (4% rise in revenue/sqft) but GM contracted 120bp YoY due to weak discretionary demand, which resulted in 130bp contraction in EBITDAM. Subsequently, EBITDA/ PAT grew only 3% YoY each (a miss of 13%/12%) during the quarter.

* However, the adverse impact from the larger-sized stores appears bottoming out with revenue/sqft and revenue/store rising 4% YoY and 5% YoY, respectively. Further, there is a limited impact from the rising cost of retailing as the 13% increase in store size over FY20-23 is now in the base.

* Robust store additions (72% footprint additions over FY20-23), healthy cost efficiencies and recovery in discretionary demand could drive growth. We have largely maintained our estimates and factored in a revenue/PAT CAGR of 26%/27% over FY23-25. Subsequently, we assign a 43x EV/EBITDA multiple on an FY25E basis to arrive at our TP of INR4,420. Reiterate BUY.

Consol. EBITDA/PAT up 3% YoY each (13%/12% miss) due to decline in GM

* Consol./standalone revenue grew 18% YoY each to INR118.7b/INR115.8b (in-line) in 1QFY24, primarily led by 12% YoY area additions.

* Revenue/store rose 5% YoY to INR1,424m (annualized) in 1QFY24, 11% above pre-Covid while revenue/sqft was up 4% YoY to INR34,452/sqft, 10% below pre-Covid witnessing signs of bottoming out (after being flattish in the last three quarters).

* Consol. GM contracted 120bp YoY and stood at 15.2% (120bp miss), which was primarily due to lower sales contribution from GM&A. Subsequently, this led to only 10% YoY rise in gross profit to INR18b (7% miss) in 1QFY24.

* Other expenses/Employee costs grew 24%/15% YoY to INR5.6b/INR2.06b in 1QFY24. On per sqft basis, Other expenses/Employee costs rose 9%/3% YoY.

* Compression in GM (by 120bp YoY) led to a contraction in EBITDA margin (by 130bp YoY) to 8.7% (130 bps miss). This led to only 3% YoY improvement in consol. EBITDA to INR10.4b (13% miss). ? Consol. PAT also grew 3% YoY to INR6.6b (12% miss). PAT margin contracted 80bp YoY to 5.6% (70bp miss) in 1QFY24. ? DMART added three stores (vs. 10 in 1QFY23) taking the total count to 327.

Key highlights from the management commentary

* GM is lower as compared to 1QFY23, primarily due to lower sales contributions from apparel and general merchandise.

* General merchandise’s contribution is recovering and trending towards prepandemic level. GM&A’s share in FY20 revenue mix was 27.3% vs. 23.0% in FY23.

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