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Sharp revenue recovery post easing of restrictions…

About the stock:

Avenue Supermarts (ASL) operates supermarket chain under ‘DMart’ 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+)

Analyst Meet highlights:

We attended the Avenue Supermarts analyst meet. The key highlights of the same are mentioned below:

* Revenue recovery rate for stores older than two years was 91% in the second half of June 2021 compared to the second half of June 2019

* In states where restrictions were relaxed earlier, stores older than two years have recorded more revenues in the last 15 days of June 2021 compared to the last 15 days of June 2019

* Total 20 stores (net) added in FY21 and four new stores have been further added in Q1FY22 taking total store count to 238 with current total retail space at 9.0 mn sq ft. ASL is planning to add ~ 35-40 new stores in FY22

* The company has been adding larger sized stores recently in the range of 50000-60000 sq ft. However, ASL will open smaller stores in range of 10000- 20000 sq ft in cities where quality large retail space availability is difficult

* The company has added three new distribution centres in FY21 (total 39 distribution centres)

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 to 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 revenue, earnings CAGR of 21%, 25%, respectively, in FY20-23E

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

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