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Strong recovery in the quarter…

Avenue Supermarts Ltd (DMart) owns & operates India’s most profitable supermarket, DMart. It provides products like Food, Non-Food (FMCG), General Merchandise & Apparel through 234 stores (total 8.82mn sq. ft).

* We upgrade to Buy rating with a revise Target of Rs.3,130 factoring strong recovery in the quarter and recent correction in stock price.

* For Q4FY21, DMart reported healthy growth in revenue at 18%YoY & strong growth in PAT at 52%YoY (de-growth in first two quarters).

* EBITDA/PAT margins improved by 170/130bps YoY each to 8.4%/6.0% aided by improvement in sales & gross margin.

* Witnessing significant disruptions in operations due to Covid second wave. ~80% of stores are operating fewer hours than they normally do and this may negatively impact on inventory to sales ratio.

* DMart added 22stores in FY21 Vs 38 YoY. Additions are likely to be impacted in the short-term, but do not expect disruptions like last year. QIP of Rs.4,098cr supports additions and boost future sales growth.

* Revenue/PAT to grow at 37%/50% CAGR over FY21-23E, value DMart on DCF basis implying 75x on FY23E EPS

Healthy recovery in the quarter, but second wave slows growth.

DMart reported healthy revenue growth of 18%YoY Vs. de-growth in the first two quarters. The overall sales was trending very close to pre-covid levels in the quarter and witnessed revival in discretionary products also, but on account of Covid second wave, significant disruptions have been witnessing since March 2021. ~80% of the stores are operating fewer hours than they normally do. The company has added 13 stores in Q4FY21 (22 stores in FY21 Vs 38 in FY20). The store additions are also likely to be impacted by the second wave in the short-term. However, we do not expect disruption like last year.

The recent QIP of Rs.4,098cr will support future growth. DMart, improved its focus on E-Com business and has expanded presence in MMR region and commenced servicing 4 new cities, Ahmedabad, Pune, Bangalore and Hyderabad. However, still online-channel contributes only ~1.5% of the total revenue as of FY21 and DMart’s approach of controlled acceleration with small trials and reviews likely to continue. Expect standalone revenue CAGR of 37% over FY21-23E.

Margins improved aided by increase in sales & gross margin

EBITDA margin improved by 170bpsYoY to 8.4% aided by improvement in sales and gross margin. Gross margin improved by 120bps YoY. Sales mix has seen a shift towards Grocery & FMCG products. General Merchandise & Apparel mix decreased to 22.9% Vs 27.3% YoY. However, second wave may negatively impact inventory to sales ratio. Reduction in debt and lower tax will support PAT growth. The company has repaid all its long-term debts by using its proceeds from recent QIP issue.

Valuation & Outlook

Covid second wave is likely to slow the growth recovery, but do not expect disruptions like last year given ongoing vaccination and better knowledge to tackle the pandemic. We believe, DMart has strong recovery potential given healthy balance sheet. We value DMart on DCF basis to arrive at a revised Target of Rs3,130 implying P/E of 75x on FY23 EPS, and upgrade to Buy factoring recent correction in stock price.

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