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Continuing to deliver on growth

* Avenue Supermarts (DMART)’s consol EBITDA/PAT grew >2x YoY on strong revenue recovery of 47% YoY (30% above pre-COVID levels). This was coupled with healthy improvement of 40bp/240bp in gross/EBITDA margins, as opex cost optimization was much better than expected.

* We revise our FY22/FY23 EBITDA/PAT estimates by ~15%, largely extrapolating current cost efficiencies, even as sharp revenue recovery was built into our estimates. We factor in an FY20–24E revenue/PAT CAGR of strong 27%/31% as we see a limited effect on growth despite the COVID-19 impact over the last 4–6 quarters. This allows the stock to operate at >2x PEG. We revise our TP to INR4,900 on earnings revision and valuation rollover to FY24E. We maintain our Neutral rating.

EBITDA/PAT doubles YoY, aided by strong revenue recovery

* Consolidated revenue grew 46.8% YoY to INR77.9b. Standalone revenue at INR76.5b came in 30% higher v/s pre-COVID levels (2QFY20). This indicates strong recovery vis-à-vis 1QFY22, which was 13% down v/s pre-COVID levels.

* SSSG turns positive: We estimate same-store sales growth (SSSG) to be in the low single digits, with nearly 29% store additions (55%) seen in the last eight quarters. On an exit run-rate, Sep’21 saw 23.7% growth v/s Sept’20.

* Gross profit grew 51% YoY, 26% above pre-COVID (in-line), with 40bp YoY gross margin expansion to 14.9% (v/s est 14.8%). EBITDA/PAT came in 2x YoY higher at INR6.7b/INR4.2b (10% above est). EBITDA/PAT margins improved 240bp/160bp YoY.

* Revenue for its subsidiary (DMart Ready) was up 58.2% YoY to INR1.4b (~2% of consolidated revenue), while EBITDA loss stood at INR16m.

2HFY22 to see store additions; inventory levels are a monitorable

* The company has done a soft launch of DMart Ready in Surat and Vadodara. As a result, the DMart Ready business now has a presence across seven cities/regions – MMR, Ahmedabad, Pune, Bangalore, Hyderabad, Surat, and Vadodara.

* Store additions: DMART added eight stores during the quarter, against our expectation of six stores. Our full-year expectation is 30 stores, implying 18 store additions in 2HFY22.

* 2HFY22 could see strong additions: It added 12 stores in 1HFY22, against our estimate of 30 stores for FY22 and the company guidance of 38 store additions. We expect the majority of additions to be back-ended in FY22, as evident from the ~70% additions seen in 2H for the past few fiscals.

* Inventory returning to normal: Contrary to the company’s statement of inventory gradually moving towards normal levels, inventory days for 1HFY22 have remained at 46 v/s pre-COVID levels of 35.

Valuation and view

* Unlike other retail categories, grocery retailers such as DMART have seen a limited impact and swift recovery from COVID-19, with healthy margin improvement.

* We revise our EBITDA/PAT estimates by ~15%, primarily led by margin improvement, as revenue recovery was largely factored in. This further provides DMart with added ammunition to compete. We expect DMart to deliver an FY20–24 revenue/PAT CAGR of 27%/31%, factoring in a 16%/11% CAGR in footprint/SSSG, with an average of 34 store additions over FY20–24E.

* a) The growing prominence of online retail in the last couple of years and b) market size increasing nearly 3–4x to ~INR400b with the prominence of deeppocketed players (such as Amazon and Reliance Retail) has made us conscious, considering DMART continues to focus on the brick-and-mortar model.

* However, DMart’s 29%/44% revenue/footprint growth v/s 2QFY20 (pre-COVID levels) gives us confidence in the company’s growth trajectory and about seeing a limited impact from online retailers – despite their highly overlapping presence.

* The stock is trading at rich valuations of 77x/122x EV-to-EBITDA / P/E on FY23E, tracing the earnings growth trajectory. We revise our TP to INR4,900 – led by 15% earnings revision and valuation rollover to FY24E – valuing DMART at FY24E EV-to-EBITDA of 52x (~19% discount to its three-year average multiple of ~64.1x). We maintain our Neutral rating.

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