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Demand revival in GM&A category remains a key monitorable

Avenue Supermarts (DMART)’s consolidated/standalone revenue grew 18.7%/18.5 YoY in 2QFY24. Revenue growth was mainly led by 11% YoY store additions. However, revenue/sqft that remained a laggard has seen a recocery and improved 6% YoY during the quarter.. This indicated higher contribution from the larger-sized stores.

Consolidated EBITDA margin for the quarter contracted 40bp YoY to 8% due to mix-led lower gross margin (reduced share of General Merchandise & Apparel (GM&A)) and higher opex.

The reducing gap between revenue/store and revenue/sqft implied that share of larger-format stores improved and this remained a key positive. Further, robust store additions (72% footprint additions over FY20-23), healthy cost efficiencies and a recovery in discretionary demand (with the onset of festive season) are likely to drive growth. We have cut our FY24E PAT by 4.6% due to slower recovery in 1HFY24E but expect gradual improvement from 2HFY24E factoring in revenue/PAT CAGR of 25%/26% over FY23-25. Subsequently, we assign a 42x EV/EBITDA multiple on an FY25E basis to arrive at our TP of INR4,500. Reiterate BUY.

Consolidated EBITDA up 12.7% YoY (11% miss) due to lower GM 

 DMART’s consolidated revenue grew 18.7% YoY to INR126.2b (in line). Standalone revenue for 2QFY24 rose ~19% YoY to INR123.1b (in line vs. INR127.7b estimated) driven by 11% YoY store additions and 7% YoY revenue/store growth to INR1,485m (annualized).

* Standalone revenue grew 6% sequentially, which was evenly distributed within footprint additions and improved throughput. 

*Standalone revenue/sqft grew 6% YoY to INR35,935/sqft indicating signs of maturity for larger stores being added recently. 

Consolidated gross margin contracted 40bp YoY and stood at 14.7% (30bp miss) primarily due to lower sales contribution from the high-margin GM&A segment. As a result, gross profit increased 15% YoY to INR18.5b (6% miss). Standalone margin contracted 50bp YoY to 14%.

 Employee cost/other expenses grew 19.1%/17.9% YoY to INR2.2b/INR6.2b during 2QFY24

Consolidated EBITDA rose 12.7% YoY to INR10b (11% miss) due to lower gross margin and higher opex. EBITDA margin contracted 40bp (60bp miss) and stood at 8% in 2QFY24.

Consolidated PBT grew 13.9% YoY to INR8.5b (12% miss). Reported PAT declined 9% YoY mainly on account of lower taxes in 2QFY23, as a result of the reversal of tax related to the previous period.

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