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Healthy recovery overshadowed by market conditions

* Avenue Supermarts (DMART)’s EBITDA grew 21% YoY driven by aggressive store expansion (21 stores in 4QFY22) and healthy cost optimization, following a weak SSSG that softened revenue growth.

* Despite the stock correcting more than 35% since its peak, the valuation remains expensive. Further, management commentary remains mixed as it points to robust recovery in Mar’22 but raises concerns of a shift in ecommerce along with an adverse impact of inflation-led consumption. We factor in FY22-24E EBITDA/PAT CAGR of 45%/49% (on consol. basis) with a strong 17% footprint CAGR, but maintain our Neutral rating on the stock with a TP of INR3,500.

Aggressive store additions and cost management amid soft LTL growth

* DMART’s Consol./Standalone revenue grew 19%/18% YoY to INR87.9b/INR86.1b (9% below our pre-quarter estimate), respectively, propelled by strong store additions partly offset by Omicron-led, nine-day loss of sale.

* Store additions of 21 were strong, and above expectation of 11 store additions, reaching 284 stores. It added 50 stores in FY22 v/s 40 estimated as per management guidance due to delayed openings during COVID. While FY22 SSSG was at 16.7%, we estimate a mid-single digit SSS decline for 4QFY22, adversely impacted by Omicron-led mini-lockdown.

* Consolidated gross margin at 15% saw a minor 20bp improvement YoY. Management mentioned that inflation benefited the margin, which was partly offset by the COVID-led unfavorable revenue mix.

* EBITDA margin for 4QFY22 has improved 10bp despite the Omicron impact and aggressive store additions, as per sq.ft. expenditure dipped 9%. Subsequently, EBITDA grew 20.7% YoY to INR7.4b (4% above est.).

* PAT stood at INR4.3b, up 3% YoY (8% miss), adversely impacted by lower other income. PAT margin was at 4.9% (-70bp YoY).

Key highlights from the management commentary

* Mar’22 indicated a robust recovery with a satisfactory LTL growth v/s Mar’21.

* However, its performance was hit by weak discretionary (non‐FMCG) segment adversely impacted by Omicron as the recovery took 40‐50 days, after restrictions were lifted.

* Management indicated that it was hard to estimate whether there was a secular change due to ecommerce shift or the impact of inflation or owing to significantly higher COVID-related adverse economic impact.

* DMART Ready doubled its revenue in FY22 and increased presence in seven more cities from five earlier, but post-Omicron, the ecommerce business has slowed down

Valuation and view

* DMART’s strong growth in footprint and cost optimization measures led to healthy 21% EBITDA growth even amid the Omicron wave.

* However, for the first time, the management deliberated whether the current quarter’s soft performance was due to any secular shift in ecommerce.

* We factor in an FY22-24E EBITDA/PAT CAGR of 45%/49% (on a consol. basis), strong 17% CAGR in footprint and an annual SSSG of 15% (9% above pre-COVID), to garner 2x PEG.

* However, we are cognizant of the prominence of new age grocery model and its rich valuation. Hence, we maintain our Neutral rating with a TP of INR3,500 assigning 42x EV/EBITDA on FY24E basis.

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