Avenue Supermarts - Q1FY22 Results Review Report - Profitability, unit economics disappoint - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

While D-MART's revenue recovery came in line with expectations, its profitability disappointed. Revenue grew 31% to INR 50.3bn (in-line), while curbs on non-essential sales during the second COVID-led lockdown put pressure on its gross margin (GM), which contracted 129bps to 12.4% (HSIE: 13.5%). However, better cost control cushioned the impact on EBITDAM (4.4%, up 156bps; HSIE: 4.7%). Management highlighted that despite fewer operational hours, footfalls were higher YoY as restrictions on personal mobility were less stringent in the recent lockdown. Unit economics continues to lag expectations. We maintain our SELL recommendation on DMART with a revised DCF-based TP of INR 2,260/sh (earlier 2,160/sh), implying 34x Jun-23E for the standalone business + 4x Jun-23E sales for DMART Ready. Note: the target price change is a function of EPS change (+3%; led by lower cost of retailing) for FY23 and DCF rollover (+2%) to Jun-23.

1QFY22 highlights: Revenue grew 31.3% to INR50.32bn (in-line). GM declined 129bps YoY to 12.4% (HSIE: 13.5%) as curbs on non-essential sales dragged it down. We suspect the heightened competitive intensity in F&G has also played a role in pressurising gross margins. EBITDAM expanded 156bps YoY to 4.4% (HSIE: 4.7%). The miss on EBITDAM was lower than that on GM as DMART continued to smartly rein in costs. Management highlighted that despite fewer operational hours, footfalls have been higher YoY, as there were less restrictions on personal mobility in the recent lockdown. However, unit economics continues to lag expectations. Revenue/GP/EBITDA per sq ft stood at INR 22,339/2,762/982 respectively (vs HSIE: INR 22,215/2,989/1,105). DMART added four stores in 1Q (store count: 238). Management indicated that inventory levels are normalising and construction activity has commenced at all sites.

Outlook: DMART's anchor variable - footfalls - and consequently unit economics remain sub-optimal and their path to complete recovery remains hazy, especially against the backdrop of heightened competitive intensity from deep-pocketed retailers. Hence, we maintain our SELL recommendation on DMART with a revised DCF-based TP of INR 2,260/sh (earlier 2,160/sh), implying 34x Jun-23E for the standalone business + 4x Jun-23E sales for DMART Ready.

Shares of Avenue Supermarts Ltd was last trading in BSE at Rs.3347.05 as compared to the previous close of Rs. 3378.95. The total number of shares traded during the day was 109734 in over 7769 trades.

The stock hit an intraday high of Rs. 3399 and intraday low of 3311.7. The net turnover during the day was Rs. 369268861.

Source : Equity Bulls

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