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GM improvement offset by higher cost of retailing

* DMART’s consolidated revenue grew 19% YoY in 1QFY25, led by 14% area addition and 4% productivity growth. An increased contribution from GM&A resulted in a 40bp improvement in gross margin (GM). Higher cost of retailing (COR) led by store adds and operating costs for improving servicing offset the GM improvement and resultant in flat EBITDAM. As a result, EBITDA/PAT grew by 18% YoY each (5%/6% miss).

* The gap between revenue/sqft (up 4.2% YoY) and revenue/store (up 4.7% YoY) continued to shrink, indicating an improvement in the share of largerformat stores, marking a positive trend. Going ahead, healthy cost efficiency and a recovery in discretionary demand should drive growth. We have broadly kept our estimates unchanged for FY25/FY26. We reiterate our BUY rating on the stock with a TP of INR5,500.

Net income misses estimates

* Standalone revenue grew 18% YoY to INR137b (in line), driven by 14% area additions and 4% revenue/sqft growth to INR35.9k (annualized).

* Consolidated revenue grew 19% YoY to INR141b (in line), supported by standalone and 27% YoY growth for DMart subsidiaries (including ecommerce).

* The gap between revenue/store (+4.7% YoY) growth and revenue/sq.ft. (+4.2% YoY) has continued to shrink for the last six quarters, indicating signs of maturity for larger stores added recently. (Refer Exhibits 9/10)

* DMART added six stores (250k sqft area), taking the total to 371 stores (15.4m sqft). This implies the addition of average 41.7k sqft stores in 1Q.

* Consol. GP grew 22% YoY to INR21.9b (in line) and margins grew 40bp YoY to 15.6%, aided by an increased contribution from GM&A. DMART had indicated previously that the GM&A segment was stabilizing.

* Consol. EBITDA grew 18% YoY to INR12.2b (5% miss) and margins remained flat YoY at 8.4%, aided by GM improvement. GM gain was offset by higher COR.

* COR grew 27% YoY, led by 14% store area adds and operating costs for improving servicing. Accordingly, COR per sqft rose 11-12% YoY in the last two quarters vs. average 5-6% increase. (Refer Exhibit 11)

* As a result, PAT grew 18% YoY to INR7.7b (6% miss) and margins remained flat YoY at 5.5%.

Management commentary

* GM&A: The contribution from General Merchandise and Apparel (GM&A) continued to improve, which reflected in gross margin improvement.

* COR: Operating costs have gone up due to continuing efforts to improve service levels and build capability for the future.

Valuation and view

* DMART clocked a 20% revenue CAGR over FY20-24, led by 18% footprint additions. Subdued SSSG was mainly due to: 1) the addition of bigger stores over the last couple of years (20% rise in average store size), and 2) weak discretionary demand (share of discretionary items reduced to 22% in FY24 from 27% in FY20).

* However, despite its weak SSSG, DMART has managed to protect its EBITDA margin at pre-Covid levels through strong cost-control measures (unlike most other retailers).

* The recovery in revenue/sqft and the reducing gap between revenue/store and revenue/sqft further implied that the share of larger-format stores improved, which is positive for DMART. Moreover, moderating inflation and revival of discretionary demand could improve the SSSG trend.

* We broadly maintain our FY25/FY26 estimates and factor in a CAGR of 22%/31% in revenue/PAT over FY24-26, aided by 11%/9% growth in footprints/revenue productivity. Subsequently, we assign a 52x EV/EBITDA multiple (83x PE) on FY26E basis to arrive at a TP of INR5,500. We reiterate our BUY rating on the stock.

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