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Strong growth and margin performance with new stores starting to contribute; maintain BUY

Our view

D?Mart registered better than expected revenue performance implying positive SSSG over pre?covid levels helped by higher inflation?led realizations and contribution of new stores opened in the last couple of years. Gross margins were higher by 340bps YoY to 15.8% driven by higher sales of high margin discretionary items; cost saving measures continue to aid operating margins. Its e?commerce business delivered robust growth of 53% with positive operating profit albeit lower YoY. We continue to believe that long term growth opportunity is intact in grocery retail given its scalable model and low?cost structure which should enable a growth rate of 25% plus for the next decade. Strong margin performance in Q1 despite high margin general merchandise and apparel categories sales still below pre? covid levels indicates strong outlook for FY23. Solid footprint expansion in both offline stores and DMart Ready should drive strong growth rates together with the low?cost structure helping maintain margins in the 9?10% band. Its strong balance sheet, aggressive store expansion, cash generation and solid SSGs boosted by DMart Ready should be key growth enablers for the company and we believe the risks from online retailers should not impact the growth trajectory much. Hence, we think the stock should be able to sustain its premium multiples with stock returns in?line with the solid earnings growth

Result Highlights

* Result summary – Strong performance on both revenue and margin fronts led by full scale uninterrupted operation. Revenue grew 95% YoY (10% above 1QFY20 after adjusting for 60% store addition) helped further by 10 new store openings in 1Q.

* Margins ? Gross margins improved 340bps/150bps YoY/QoQ driven by scale benefits. Sales of higher margin general merchandise and apparel saw better traction but still below pre?covid levels due to some overhand of covid?led disruption and inflation. EBITDA margin improvement of 170bps QoQ to 10.3% aided by continuation of strong cost controls.

* Our calculated revenue/sqft and EBITDA/sqft stood at Rs 32,419/sqft and Rs 3,332/sqft. Positive operating leverage helped clock best?ever PAT margin of 6.9% displaying strength of DMart’s business model.

Valuation

We believe full scale uninterrupted operation and underlying demand and operating efficiency keeps getting better as operations normalize. We increase our EPS estimates by 11-12% for FY23/FY24 to factor in higher margins due to a superior sales mix and operating efficiency. We now model in revenue/PAT CAGR of 34%/52% over FY22-24E, the highest growth in the large cap consumption space and maintain our BUY rating with a revised PT of Rs 4,971 based on 60x FY24E EV/EBITDA, implying 74x FY24 P/E. Key risk would be a higher than expected disruption by online retailers which impact the long-term business prospects for DMart.

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