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Stable showing; watch out for mix

Avenue Supermarts (DMart) reported an in-line Q3FY22 performance despite a slight gross margin miss (14.9% versus 15.1% estimate; Q3FY20: 15%). Other highlights: i) Sales recovery – disclosed earlier – at 91% (on revenue/sq.ft) did lag our initial expectations of 100% recovery. ii) Store additions (17 in Q3FY22) is on course to meet the target of a total of 60 over FY20–22. iii) Management highlighted GM & Apparel is consistently contributing less to mix. iv) No incremental update on DMart Ready.

Given the pace of recovery, we are tweaking down FY22E revenue/EBITDA by 3%. This coupled with a rollover to Q1FY24E yields a TP of INR3,966 (65x EV/EBITDA; INR3,738 earlier). Retain ‘REDUCE’.

EBITDA margin in line with estimates; business mix impacted again

DMart reported standalone revenue growth of 22% YoY (up 19% QoQ). For Q3FY22, overall recovery (based on revenue/sq.ft) stood at 91% of Q3FY20. Gross margin marginally undershot at 14.9% (estimate: 15.1%, Q3FY20: 15%). Management commented the general merchandise & apparel business is consistently making relatively low contribution to sales while essentials and FMCG is doing better. Based on the commentary, we anticipate greater impact on the sub-category of apparel & footwear within GM & Merchandise. DMart managed to keep a check on expenses, due to which EBITDA margin at 9.7% came in line with estimates.

Stores addition robust; trend of higher store sizes sustains

Store additions did accelerate with addition of 17 stores/0.9mn sq.ft, one of its largest additions in a quarter and DMart’s largest addition since Q4FY20. The company has overall added 29 stores for the year and is on course to meet its target of 60 additions (over FY20–22. Also, the trend of higher store sizes continued with the average store size of new stores being 50,600sq.ft. (average: 39,000sq.ft.). DMart’s subsidiary revenues, a partial proxy for DMart Ready, shot up 40% YoY/10% QoQ. Subsidiary gross margin dropped though, down 340bp QoQ, but EBIDTA margin stayed flat QoQ. Its losses widened QoQ from INR311mn to INR333mn in Q3FY22.

Outlook and valuation: Opportunity factored in; maintain ‘REDUCE’

Given the pace of recovery, we are tweaking FY22E revenue/EBITDA down by 3%. Our FY23/24 estimates remain unchanged. We continue to value DMart at 65x EV/EBITDA but are rolling forward the valuation to Q1FY23, which yields a revised TP of INR3,966 (INR3,782 earlier). Maintain ‘REDUCE’.

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