Buy Avenue Supermarts Ltd. For Target Rs. 5,200 - Geojit Financial Services Ltd
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Healthy topline growth, product mix improves.
Avenue Supermarts Ltd. (DMart) owns & operates India’s most profitable supermarket chain, DMart. It provides products like food, non-food (FMCG), general merchandise & apparel through 365 stores (total 15.15mn sq. ft).
* We maintain our BUY rating with a revised target price of Rs. 5,200 owing to strong revenue growth and store additions.
* Revenue grew by 20%YoY, while gross margin improved by 30bpsYoY to 13.7% due to an improved product mix. Operating profit grew by 20%YoY as the EBITDA margin was maintained at 7.6%.
* Q4FY24 saw a sustained increase in demand for discretionary products, bolstered by moderating inflation which is expected to enhance profit margins moving forward.
* DMart continued its strong store additions, adding 41 stores in FY24 (131 in last 3years), which, along with the likely improvement in demand, will aid improvement in topline growth.
* We expect Revenue/PAT to grow at a 23%/29% CAGR over FY24-26E. DMart currently trades at 84x 1Yr Fwd PE. We value DMart on a DCF basis, which implies 76x on FY26 EPS.
Healthy topline growth aided by strong store additions.
DMart reported healthy revenue growth of 20% YoY, aided by strong store additions in recent years. DMart opened 41 new stores in FY24 and 131 stores in the last 3 years, which, along with a likely improvement in demand due to moderating inflation, will aid future growth. Further, DMart is gradually improving its E-Com business channel, ‘DMart Ready’, currently available in 23 cities, which now contributes ~2.5% of total revenue. Recently, the company has set up a new subsidiary, Reflect Healthcare and Retail Private Limited, to launch pharmacy shop-in-shops and has opened one in the Mumbai metropolitan region. Pharmacy shop-in-shops are expected to scale up in the future, which, will also boost footfalls. We expect a standalone revenue CAGR of 23% over FY24-26E, supported by healthy store additions.
Margins to recover on improving in product mix.
Gross margin improved by 30bps YoY to 13.7% due to an improvement in the product mix. During past several quarters, due to inflationary pressure, contribution from higher margin segments like general merchandise & apparel business (22.4% mix in total revenue) was lower, which has impacted margins. Now, as per the management, Q4FY24 saw continued uptick in demand for discretionary products, which has supported gross margin improvement in the quarter while EBITDA margin was maintained at 7.6% on YoY basis. The discretionary mix is expected to improve going forward, aided by moderating inflation, which will improve margins in the coming quarters.
Valuation & Outlook
DMart has strong growth potential given its healthy balance sheet with no debt and strong operational efficiency. Strong store additions will aid future revenue growth, while moderating inflation will improve discretionary demand and margins. DMart is currently trading at 84x 1Yr Fwd PE. We arrive at a target price of Rs.5,200 by valuing on a DCF basis, which implies 76x on FY26 EPS, maintaining our BUY rating.
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