Avenue Supermarts - Reaffirmation of VFM positioning - ICICI Securities

DMart's 4Q was impressive. 6% SSG in Jan-Feb reconfirms the (consumer) relevance of value for money positioning, which, in our view, may potentially be a stronger competitive advantage in FY21-23e. Recovery in general merchandise and apparel was pleasing - driving gross and operating margin expansion of 120 and 170 bps, respectively. That said, operational short-term challenges exist as ~50% of stores are in Maharashtra and Gujarat (limited operating hours). Notable events of FY21 are (1) it added 22 new stores, (2) inventory days were up (+6 days) (3) converted two stores to e-commerce fulfilment centres, (4) extended DMart Ready (e-com) to general merchandise. After the material (>35%) stock underperformance over last one year, valuations have become a tad more palatable (stock now trades at 73x P/E and 50x EBIDTA on FY2023e). REDUCE rating stays (TP Rs2,600).

- Revenue grew driven by return of normalcy: Revenue / EBITDA / PAT grew 18% / 48% / 52% YoY respectively. This performance was driven by return of normalcy with reduction in covid cases, removal of restrictions across the country and revival of discretionary spends which was not seen for the rest of FY21. However, Mar'21 was impacted due to second wave of covid which continue to impact the revenues due to restricted store operations with currently ~80% of stores being impacted with either restricted operating hours (not more than 4 hours per day), weekend or extended closures.

- Margin expansion driven by agile opex management: Gross margin expanded 120bps YoY to 14.4% driven by sales mix returning to normalcy with revival of discretionary spends. EBITDA margin further expanded by 170bps YoY to 8.4% primarily driven by agile opex management - other expenses was down 40bps YoY. However, with emergence of second wave of covid inferior product mix will again impact margins significantly. We model 8% EBITDA margin in FY22.

- Other highlights: 1) Opened 13 new stores in Q4 with total retail space of 8.8mn sq. ft. (22 stores in FY21), 2) Contribution of general merchandise and apparel declined from 27.3% in FY20 to 22.9% in FY21, 3) Total Bill Cuts declined by 24% to 152mn in FY21, 4) SSG declined by 13.1% in FY21, 4) DMart Ready increased presence in Mumbai region and expanded service to Ahmedabad, Pune, Bangalore and Hyderabad, 5) Construction activity is disrupted across cities which could impact the new store opening however management is optimistic as there is no migration of construction workers, 6) OCF grew by 8% to Rs13.9bn while FCF was reported a loss of Rs5.7bn, 7) Working capital days increased by 4 days largely due to higher inventory days (inventory built up in estimation of return to normalcy).

- Valuation and risks: We have cut our earnings estimates by ~22-14% for FY23 adjusting for impact for store operations and inferior mix; modelling revenue / EBITDA / PAT CAGR of 35% / 47% / 48% over FY21-23E. Maintain REDUCE with DCF-based target price of Rs2,600. At our target price, the stock will trade at 66x P/E Mar'23E. Key upside risks are fast turnaround of e-commerce operations and lower-than-expected competitive intensity.

Shares of Avenue Supermarts Ltd was last trading in BSE at Rs.2888.75 as compared to the previous close of Rs. 2878.05. The total number of shares traded during the day was 17826 in over 1850 trades.

The stock hit an intraday high of Rs. 2954.95 and intraday low of 2851. The net turnover during the day was Rs. 51929401.

Source : Equity Bulls

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