Large Cap : Sell Avenue Supermarts Ltd For Target Rs.4,150 - Geojit Financial
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Covid resurgence impacts short-term outlook
Avenue Supermarts Ltd (DMart) owns & operates India’s most profitable supermarket, DMart. It provides products like Food, Non-Food (FMCG), General Merchandise & Apparel through 263 stores (total 10.3mn sq. ft).
* We maintain our SELL rating with a Target of Rs.4,150 factoring likely impact due to resurgence of Covid-19 cases in the short-term and expensive valuation.
* For Q3FY22, DMart reported healthy growth in Sales/PAT by 22%/24% YoY (below expectation). E-com subsidiary (DMart Ready) witnessed 38%YoY growth to Rs.1.5bn (~1.6% of total sales).
* Gross margin declined by 20bps YoY due to deterioration in product mix, however EBITDA margin improved by 30bps YoY to 9.6%.
* Store addition was strong (17/29 stores in Q3/9MFY22 & 60 stores in last 2Yrs) which will support strong growth when the economy normalizes. QIP of Rs.4,098cr supports acceleration in store additions.
* Expect Revenue/PAT to grow at 33%/43% CAGR over FY21-24E. We value DMart on DCF basis implying P/E of 78x on FY24 EPS.
Healthy growth in topline but below expectation.
DMart reported revenue growth of 22%YoY (below expectation) supported by recovery in footfalls along with strong store additions in recent quarters. The recovery momentum which was witnessed from Q4FY21 had slowed subsequently due to Covid 2nd wave. Now, the short-term demand outlook is again under pressure due to resurgence of Covid cases in recent months as the footfall will be dependent on local regulations. However, DMart’s strong store additions will support future growth when the economy normalises. The recent QIP of Rs.4,098cr is supporting acceleration in store additions. DMart has added 17/29 stores in Q3/9MFY22 & 60 stores in last 2Yrs. DMart, improved its focus on E-Com business ‘DMart Ready’ which grew 38%YoY, but currently contributes only ~1.6% of the total revenue as of Q3FY22, improved from ~1.5% in FY21. We marginally reduce our revenue assumptions and expect standalone revenue CAGR of 33% over FY21-24E.
Gross margin declines on weak product mix
Gross margin declined by 20bps YoY due to weak product mix. Covid-19 pandemic had caused a shift in consumer preference towards essential products and resulted in lower margin. However, with more ease in restrictions and resultant recovery in footfalls, margins recovered sharply in the subsequent quarters but again started witnessing some pressure in Q3FY22 which is likely to continue in the short-term on account of recent resurgence in Covid-19 cases.
Valuation & Outlook
The recent resurgence of Covid-19 cases slows the recovery momentum which was aided by ongoing vaccinations and the ease in restrictions in previous quarters. DMart has strong recovery potential given healthy balance sheet and strong operational efficiency. Additionally, strong store additions and higher sales value due to inflation will also support strong growth when the economy normalises. We value DMart on DCF basis to arrive at a Target of Rs. 4,150 implying P/E of 78x on FY24 EPS, maintain SELL rating due to expensive valuation and short-term uncertainty on resurgence of Covid cases.
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