Buy Avenue Supermarts Ltd For Target Rs.4700 - ICICI Direct
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Positive surprise on margins enhances performance…
About the stock: Avenue Supermarts (ASL) operates supermarket chain under ‘DMart’ brand with core focus on value retailing. D-Mart, through its proven business model, has been able to maintain consistent profitability and remains an exceptional performer in its peer group.
* D-Mart has progressively improved its return ratios (RoIC: 20%+) despite being capital intensive (follows ownership model)
* Robust store operating metrics (breakeven in 18-24 months of its operations and one of industry best revenue/sq ft: | 30000+)
Q1FY23: Results were a comprehensive beat on the profitability front driven by sustained improvement in product mix (GM & apparel)
* On tepid base, sales up 94% YoY to | 10038 crore (three year CAGR: 20%)
* Recovery in GM & apparel (which yields higher margins) translated into gross margins improving materially by 320 bps YoY to 16.3%. EBITDA grew 350% YoY to | 1008 crore (three-year CAGR: 19%)
* Driven by robust operational performance, it posted more than 6x jump in net profits (on a favourable base) to | 642.9 crore (three-year CAGR: 26%)
* The company added 10 new D-Mart outlets taking the total store count to 294 with total business area now crossing 12 million sq ft
What should investors do? ASL has been a consistent compounder with the stock price increasing at 35% CAGR in the last five years. D-Mart continues to remain India’s most profitable low cost retailer, a strong play on India’s retail growth story and a key beneficiary of the unorganised to organised segment shift.
* We maintain BUY recommendation on the stock
Target Price and Valuation: We value ASL at | 4700 i.e. 5.5x FY24E EV/Sales (previous target price: | 4530)
Key triggers for future price performance:
* We anticipate store addition trajectory to accelerate and bake in 80 incremental store additions (addition of ~ 4.8 mn sq ft) in FY23-24E
* Robust liquidity position and healthy operating cashflows to provide impetus to store addition pace (FY22 cash & investments: | 1500+ crore)
* We model revenue, earnings CAGR of 32%, 48%, respectively, in FY22-24E
Alternate Stock Idea: Apart from ASL, in our retail coverage we also like Trent.
* Inherent strength of brands (Westside, Zudio, Zara) and proven business model positions Trent as a key beneficiary of economy unlock theme
* We have a BUY rating with target price of | 1470/share.
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