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Accelerated store addition to spur revenue growth…

About the stock: Avenue Supermarts (ASL) operates the supermarket chain under the ‘D-Mart’ brand with a 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 enhanced 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: | 32000+)

Q1FY22 Results: Operating performance was a miss on consensus estimates as EBITDA margins came in lower than expected

* Reported revenue de-growth of 30% QoQ to | 5183.2 crore (up 33.5% YoY)

* Gross margins declined 170 bps QoQ to 13.1%, with EBITDA margins contracting 390 bps QoQ to 4.3%

* Lower other income (down 35% QoQ) further impacted profitability with PAT coming in at | 95.4 crore (Q4FY21: | 413.9 crore, Q1FY21: | 40.1 crore)  Added four new stores taking total count to 238 stores (9.0 mn sq ft)

What should investors do? Despite trading at premium valuations, ASL has been a consistent compounder with stock price appreciating at 31% CAGR in the last three years

* We continue to remain structurally positive and maintain HOLD rating

Target Price and Valuation: We value ASL at | 3720 i.e. 60x FY23E EV/EBITDA

Key triggers for future price performance:

* We anticipate store addition trajectory will accelerate in FY22, FY23E and bake in 80 incremental store additions (addition of ~ 5.0 mn sq ft)

* Robust liquidity position and healthy operating cashflows to provide impetus to store addition pace

* Expect revenue recovery to pick up pace from H2FY22 onwards and model in revenue and earnings CAGR of 21%, 25%, respectively in FY20-23E

* Will continue generating industry best RoIC of ~23% in FY23E

Alternate Stock Idea: Apart from ASL, in our retail coverage we also like Trent

* Inherent strength of brands (Westside, Zudio, Star, Zara) and proven business model coupled by fast paced ramp up Zudio revenues and reduction of losses in Star Bazaar position Trent as a preferred pick

* BUY with target price of | 1015

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