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Earnings recover almost to pre-COVID levels

* Revenue recovery in DMART has been healthy (+11% YoY, in-line), with a 20bp EBITDA margin improvement, possibly due to easing price competition, even as sales of margin accretive Apparels and Consumer Discretionary remain low.

* We have marginally revised our EBITDA/PAT estimate upwards by 4%/3% for FY22E, factoring in 69%/30% EBITDA growth for FY21E/FY22E, reflecting the gradual recovery from 3QFY21. Maintain Neutral.

Gross margin improves marginally despite lower sales in margin accretive categories

* Consolidated revenue grew by 11% YoY (in-line) to INR75b, with an estimated SSSG decline of 3% (-4% exit run-rate in Dec’20), given the sequential improvement in the business.

* Gross margins recovered to 15.5% (+20bp YoY) despite the management commentary on sluggish sales recovery of margin accretive discretionary category – Apparel, Footwear, Travel, and Laundry – due to the likelihood of easing price competition.

* EBITDA grew 16% YoY (in-line) at INR6.9b, with margin recovering to 9.1% (+40bpsYoY) on the back of better gross margin and control on SG&A costs in a weak sales environment.

* Other income came in higher at INR4.5b (7.5x YoY) due to interest income earned on the surplus cash left over from the QIP in Mar’20. PAT grew 16% YoY (in-line) at INR4.5b, with PAT margin at 5.9% (+30bps YoY).

* DMART added one new store during 3QFY21 (total nine store additions during 9MFY21). Its total store count now stands at 221.

DMart Ready continues to expand into newer cities

* DMart Ready has grown by 92% YoY to INR1b, (forming a mere 1% of consolidated revenue), with an EBITDA loss of INR22m.

* The company has soft launched DMart Ready in select pin codes of Ahmedabad, Bengaluru, and Hyderabad. It has leased some part of its store space to DMart Ready to commence e-commerce operations in those cities.

* DMart Ready would continue with its conservative approach of small trials, reviews, and controlled acceleration.

Valuation and view

* We expect DMART to deliver FY20-23E revenue/EBITDA CAGR of 23%/23%, factoring in 18%/44% SSSG (two-year SSG over the low base of FY21) and 40 store additions each in FY22E/FY23E. Unlike other retailers, grocery retailers like DMART have seen a swift recovery to almost pre-COVID levels. A further improvement in product mix could improve margin.

* The strong recovery to nearly pre-COVID levels has led to the sharp rally in the counter. The stock is trading at 48x/77x FY23E EV-to-EBIDA/FY23E P/E.

* Expensive valuations, coupled with risk of growth moderation owing to strong traction in online retailers in a post-COVID world and prominence of deep pocket players like Amazon and Reliance Retail, restrict near-term upside in our view.

* We roll over our valuation to FY23E, valuing DMART at FY23E EV-to-EBITDA of 45x, (which is a ~20% discount to its three-year average multiple of ~55x). We retain our Neutral recommendation, but raise our TP to INR2,850 per share (v/s INR2,100 earlier).

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