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Building dominance across the Hindi Heartland; maintain BUY

AVL posted a robust and inline topline growth of 39% (21% SSG), albeit PAT came at a 4% miss due to higher growth investment. The Q1 show is top-notch, with AVL also having outperformed peers, thus reflecting deep underpenetration in the Hindi Heartland. Q2TD trends remain encouraging, granting us confidence on ~35% growth in FY25E. Positively, thrust on premiumization, financing, and store expansion is aiding faster-than-expected ramp-up of UP (new market) for AVL, adding 8% to Q1 topline within 12-15M of entry. AVL maintains its store addition target of 25-30 in FY25 and crossing the 200-store mark by FY26. Inventory normalized to Rs3.67bn at Q1-end (Rs24mn/store), after a seasonally-high inventory of Rs4.33bn at end-FY24. Better cash flows partially offset the impact of higher growth investments, leading to a 2-3% cut to our earnings estimate. Continued execution on expected lines and better liquidity with the potential split/NSE listing offer scope for a healthy re-rating. We maintain BUY on AVL and with TP of Rs5,800/share (40x Jun-26E EPS).

Robust topline growth with industry-leading SSG at 21%; Q2TD trends remain encouraging:

Of the reported 39% revenue growth in Q1, SSG provided 21% growth, with the balance accounted for by new-store additions. The robust Q1 SSG was on account of strong summer season with higher growth in AC sales (56% growth). We believe AVL’s performance is better vs other retail categories; where weak trends persisted. AVL added 5 stores in Q1 taking the total to 150 stores; the FY25 guidance to add 25-30 stores was maintained. Bihar/Jharkhand/UP contributed 81%/11%/8% to the Q1 topline, respectively. With healthy initial trends in the UP market, AVL plans to move toward Central UP in FY25 and further fortify the existing Bihar/Jharkhand markets in FY26 along with venturing into Western UP/MP/Chhattisgarh regions. Gross margin was flat, whereas EBITDA margin was down by 30bps to 9.6%, led by higher growth investments due to foray in new territories. AVL is doing higher promotional spends in the new UP market along-with many stores yet to achieve maturity.

Earnings call KTAs:

1) Growth rate of non-compressor products was heathy at 15%, with sequential improvement in growth for non-compressor products. 2) With extra stimulus to Bihar in the Union Budget and GoI’s focus on other regions in the Hindi Heartland; the long-term growth prospects remain encouraging. New stores in the UP market continue to perform well and topline of these stores are ahead of AVL’s expectations. 3) Financing-backed sales contributed 44% to the topline. 4) ESOP expense for Q1 was Rs5mn and is expected at ~Rs20mn for FY25. Employee expense was high in Q1 led by higher incentive-based pay in line with sales 5) Gross margins are likely to remain range bound as AVL is entering new regions, which require aggressive pricing to gain market share. However, EBITDA guidance of 8-10% was maintained. 6) Finance cost for quarters was ~Rs21mn, excluding lease obligations; usage of credit facilities were higher to meet the strong demand. 7) Capex/WC costs per store are up 10-15%, in-line with inflation. 8) Inventory reduced by Rs0.7bn to Rs3.7bn vs Rs4.3bn at end of FY24. 9) AVL is debt-free with cash equivalents of ~Rs1.2bn as on Q1-end. 10) Despite the higher restrictions on retail loans, AVL has not experienced any such restrictions impacting its sales. 11) AVL will apply for NSE listing following the share split by August-end. Listing should be completed by end of Q2/early Q3.

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