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Muted 1Q; a beneficiary of consumers seeking value & inflation pass-through in FY21-23e

DMart’s 1Q revenue performance was decent in the context of strict operating restrictions. However, a ~130 bps yoy decline in gross margin was concerning given sales mix would have been largely comparable (weak general merchandise); EBITDA margin expansion was led by operating leverage. In FY22 and beyond, we believe, it will benefit from (1) the (consumer) relevance of value for money positioning, which, in our view, may potentially be a stronger competitive advantage in FY22-23E and (2) price-led operating leverage (beneficiary of inflation in staples, FMCG). Recovery in general merchandise and apparel should also be swift (as seen last year as well). Extremely expensive valuations limit our willingness to have a constructive view; stock now trades at 85x P/E and 58x EV/EBIDTA on FY2023E. REDUCE rating stays (TP Rs3,000).

Revenue growth led by better mobility:

Revenue / EBITDA / PAT grew 31% / 103% / 132% YoY respectively. This performance was driven by better mobility compared to the base quarter (1QFY20) even as the restrictions on store operations were more severe this time (store timings had to be curtained despite the essential classification). We note that in the second wave, restrictions on movement of people for non-essential purposes were softer (compared to same time last year) which aided mobility in general. However, on a sequential basis, the impact of revenue was visible with revenue declining 31% QoQ. Interestingly, management has said that a store needs 45 days of unhindered operational time to get back to pre-Covid sales momentum.

Leverage-led margin expansion despite weak GMs:

Gross margin contracted 130bps YoY to 12.4%; on QoQ basis, margins were down 200bps. We note that this was the lowest ever gross margin print. Even as limited sale of general merchandise would have continued to impact margins, the contraction (on YoY basis) is sharp. We believe the benefit of rising staples and FMCG prices is yet to be seen in margins. Nevertheless, EBITDA margin expanded 160bps YoY to 4.4% primarily driven operating leverage benefit.

Other highlights:

1) Opened 4 new stores in Q1 (22 in the last one year) adding retail space of 0.2mn sq. ft.; it now has 238 stores with a retail space of 9.0mn sqft, 2) Construction activity has commenced across all sites, 3) Relaxation of lockdown measures in multiple cities is aiding better footfalls.

Valuation and risks:

Our earnings estimates are largely unchanged for FY23E; we now model revenue / EBITDA / PAT CAGR of 35% / 48% / 49% over FY21-23E. Maintain REDUCE with DCF-based revised target price of Rs3,000. Key upside risks are fast turnaround of e-commerce operations and lower-than-expected competitive intensity.

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