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Healthy growth momentum continues

DMART reported standalone sales growth of 36% YoY. Gross/EBITDA margin stood at 14.5/8.6% (+20/-20bps YoY). DMART’s primary segment Foods and non-FMCG continued its strong momentum in 2QFY23. Standalone EBITDA/PBT/PAT grew by 33.5/32/63% respectively. DMART’s 3-yr CAGR (2QFY20-2QFY23) sales/EBITDA/PAT stood at 20/20/30%. We maintain our FY23/24 estimates and roll forward our estimates to FY25. We upgrade from ADD to BUY rating valuing the stock at 85x H1FY25E EPS estimates to arrive at a TP of Rs5,205.

Aggressive store expansion continues

DMART opened 126 stores over the last 3.5 years. It added 8 new stores during the quarter taking its total store count to 302 as at H1FY23. As DMART continues to expand into newer cities, its store concentration from its two key states MH and GJ continues to decline (from 76% in FY16 to 47% in 1HFY23). Telangana, Karnataka and AP continue to be the other three key states making up another 29% of total store count. DMART Ready stores (pickup stores) are gradually expanding to larger towns. It has increased its presence to 18 cities from 12 in 1QFY23. However the capital allocation in the newer cities will remain commensurate. More than 90% of sales for DMART Ready continue to come from Mumbai (MMR), Pune, Bangalore, Hyderabad and Ahmedabad.

GM&A category witnessed partial recovery

Sales contribution from General Merchandise & Apparel (GM&A) segment recovered slightly to 24.75% in H1FY23 from 23.4% in FY22. However, contribution from GM&A is still below FY19 levels of 28.3%. Initially, impact of COVID and now higher inflation have delayed complete recovery in this category. GM&A includes Bed & Bath, Footwear, Apparel, Crockery, Home Appliances and Plastic goods. This is the highest margin category clocking EBITDA margins of 20%+ during the pre-pandemic days as per our estimates.

Healthy improvement in LFL led by younger stores

LFL (Like-for-Like) growth as at H1FY23 for stores older than 5 years came at 6.5% annualized while on an absolute basis it grew 21% over pre-pandemic quarter of 2QFY20. LFL for stores older than 2 years stood at 41.6% in H1FY23 vs 16.7% in FY22 LFL and - 13.1% in FY21 implying initiation of healthy recovery. The older stores with higher sales/sqft vs. company average and ones with another new DMART store close by are registering lesser LFL growth. LFL growth and average sales/store at company level depends on the number of new stores added per year and their population profile. Over time as the DMART brand has become more popular, store revenues have started accelerating at a faster pace than earlier. Within that, large metros bring in revenues much faster and much higher absolute levels than smaller cities. Yet, the newer stores have revenues per store significantly lower than the older stores.

We remain attracted by DMART’s sharp execution skills and large opportunity size. The organized grocery retail industry penetration is at 4-5% in India giving enough headroom for the company to grow. We roll forward our estimates to FY25. We upgrade from ADD to BUY rating valuing the stock at 85x H1FY25E EPS estimates to arrive at a TP of Rs5,205

Valuation

We remain attracted by DMART’s sharp execution skills and large opportunity size. The organized grocery retail industry penetration is at 4-5% in India giving enough headroom for the company to grow. We roll forward our estimates to FY25. We upgrade from ADD to BUY rating valuing the stock at 85x H1FY25E EPS estimates to arrive at a TP of Rs5,205.

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