Avenue Supermarts (DMart) - Q2FY21RU - Mr. Himanshu Nayyar, YES SECURITIES

Avenue Supermarts 2QFY21 results - better than expected performance, risk-reward turns favorable

Result summary - Overall better than expected performance led by a quicker normalization of overall business with a strong sequential recovery. Revenue / EBITDA / PAT decline of 12%/37%/37% respectively vs our expectation of a decline of 15%/47%/49% respectively.

Topline- Revenue down 12% yoy to Rs 52.2bn, margins down 250bps to 6.2% and PAT down 37% yoy to Rs 2.1bn. SSSG decline of 12.5% in September for 158 stores more than 2 years old.

Margins- Gross margins came in line with expectations at 14% given the inferior mix in favor of FMCG and staples while EBITDA margins were impacted due to negative operating leverage.

Store expansion/closure - Company opened 6 new stores during the quarter and closed 2 (for the first time given there are stores in a vicinity of 4 kms) converting them into fulfillment centres taking the total store count to 220.

DMart Ready- Revenue from subs (D Mart Ready) more than doubled from Rs 42cr to 88cr in 2Q. Company increased footprint to Pune and opened fulfillment centres in Mira Road and Kalyan to increase reach in those markets.

Monthly progression Business continues to recover month-on-month for the company with lower footfalls getting offset by higher basket values, which continues to normalize at a good pace.

Sales mix - September sales of FMCG and staples higher yoy while general merchandise and garment sales remain weak although see strong sequential recovery; contributed 23% to sales vs 27% last year.

Outlook- Hoping for strong sales in festive period; FMCG business and large suppliers are seeing strong growth trends while non-FMCG SME suppliers continue to face headwinds; company supporting to the extent possible with focus on tackling supply issues from demand issues earlier.

Our view (risk reward turns favorable for buying into the stock)- After the recent underperformance, the stock is currently trading at 55x FY22E P/E and 35x EV/EBITDA. While we have been negative on the stock given the risks to FY21 earnings and medium-term risk of multiple de-rating, the better than expected recovery trajectory and the correction in valuation multiples makes us turn more constructive on the stock. Increased focus and increasing traction in DMart Ready is another positive sign. Notwithstanding the medium term disruption risk from players like Reliance Jio, Amazon and Flipkart, we believe the company is in a good position to lock in real estate for the next 3-4 years at attractive terms given its cash rich position. Its core advantage of owning its stores, lowest cost of operations and best-in-class execution should help it remain a relevant player going forward. Current valuations look reasonable given the best-in-class earnings visibility among in the large cap consumption space.

Shares of Avenue Supermarts Ltd was last trading in BSE at Rs.1983.6 as compared to the previous close of Rs. 1977.7. The total number of shares traded during the day was 32408 in over 4197 trades.

The stock hit an intraday high of Rs. 1998 and intraday low of 1969.8. The net turnover during the day was Rs. 64120442.

Source : Equity Bulls

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