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Not a BAAP story (please allow us to repeat an acronym which we coined in July 2020)

Consensus (continues to) believe that DMart is a linear and secular growth story. We disagree. This analyst's >20 years Consumer experience suggests that in India, nuances matter more. We disagree with consensus' over-enthusiasm of BAAP. SELL.

Watch-out for DMart (and modern retail) potentially getting disrupted like how India skipped wireline penetration and jumped directly to wireless.

DMart’s 3Q revenue performance was underwhelming despite near-normal operating conditions plus significant commodity inflation (traders/retailers are "assumed" to be beneficiaries). Gross margin print of 14.9% was dismal – weak recovery in fashion and general merchandise continues to weigh on both revenue and margins, in our opinion. EBITDA margin expansion was driven by operating leverage. In FY23-24E, we believe it could (continue to) benefit from (1) the (consumer) relevance of value for money positioning, which, in our view, may potentially be a stronger competitive advantage and (2) price-led operating leverage (beneficiary of inflation). DMart Ready’s gradual expansion is an area to track closely, though consensus expectation is of a much quicker ramp-up. Extremely expensive valuations limit our willingness (and ability) to have a constructive view. Retain SELL; TP Rs3,900.

* Revenue growth led by better mobility: Revenue / EBITDA / PAT grew 22% / 26% / 25% YoY respectively. On a 2-year and 3-year CAGR basis, revenue growth was 16% and 18%, respectively. There is some softening of growth rates despite nearnormal operating restrictions; we note most retailers have highlighted lower footfalls (vs pre-Covid levels) but higher conversions (or bill size in case of DMart). The management has also highlighted that (1) demand for general merchandise and apparel business has still not recovered and (2) inflation and lesser opportunities to go out are impacting certain categories more than others. We note that in the past management has stated that a store needs 45 days of unhindered operational time to get back to pre-Covid sales momentum. DMart Ready continued to scale-up well with growth of 40% YoY to Rs1.53bn.

* Store addition: DMart added 17 stores in the quarter (9MFY22: 29), taking its total store count to 263 outlets (10.3 mn sq. ft.). DMart seems to be adding stores of larger sizes – as per our math, the average size of new stores is ~50,600 sq. ft. versus overall average of ~39,200 sq. ft.

* Weak gross margin print: Gross margin was down 20bps YoY to 14.9%. We note that this is still much better the low of 12.4% in 1QFY22. As highlighted above, a weak mix continued to impact gross margin print. Secondly, DMart intends to drive efficiency gains in procurement and also make assortment sharper (amidst the current inflationary times). Nevertheless, EBITDA margin expanded 30bps YoY to 9.6% primarily driven operating leverage benefit.

* Valuation and risks: We cut our earnings estimate for FY22E / FY23E by ~9% / ~1% respectively; we now model revenue / EBITDA / PAT CAGR of 32% / 43% / 44% over FY21-24E. Maintain SELL with DCF-based unchanged target price of Rs3,900. Key upside risks are fast turnaround of e-commerce operations and lowerthan-expected competitive intensity.

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