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Avenue Supermarts - Fast recovery; there are speed breakers though - ICICI Securities

Posted On: 2021-01-12 03:22:34 (Time Zone: Arizona, USA)

Q3FY21 was a recovery. 10% revenue growth - quarterly store throughput down just 10% YoY. However, a slowdown in performance in December (due to weak demand and store operation restrictions, in our view) means that complete recovery and return to the historical growth trajectory could still be some time away. Although cost control measures and mix recovery (in the festival period) led to margin expansion in Q3, there are near-term headwinds (inconsistent supplies in non-FMCG, inflationary input costs). Over the long-term, we like the soft launch of ecommerce operations in some cities, however, focus continues to be brick and mortar stores and e-commerce ramp up will be a slow process, in our view. Resurgence of Kiranas (mom-and-pop stores) remains a key headwind. REDUCE.

- Revenue grew driven by return of normalcy and festive season: Revenue / EBITDA / PAT grew 10% / 17% / 19% YoY respectively. The performance was driven by 1) higher footfalls driven by the festive season (Oct-Nov) and 2) higher (YoY) ticket size (albeit lower than at the peak of COVID lockdown) as consumers look to limit the number of trips to stores. However, stores that are 2 years or older (162 stores) saw 4% revenue decline in Dec'20 due to restricted store operations and weekend closure in some cities post the festival period.

- Margin expansion driven by agile opex management: Gross margin expanded 10bps YoY (+110bps QoQ) to 15.1% driven by sales mix returning to normalcy. EBITDA margin further expanded by 50bps YoY to 9.3% primarily driven by agile opex management - other expenses was down 50bps YoY (flattish on an absolute basis). However, profitability could be under pressure due to (1) potential inconsistent supplies from non-FMCG sector, (2) rising raw material prices and (3) lower non-FMCG contribution. We estimate 7.5% EBITDA margin in FY21.

- Valuation and risks: We increase our earnings estimates by ~2% for FY22; modelling revenue / EBITDA / PAT CAGR of 23% / 26% / 30% over FY20-23E. Maintain REDUCE with revised DCF-based target price of Rs2,700 (earlier Rs2,400) as we roll forward to March 2022. At our target price, the stock will trade at 59x P/E Mar'22E. 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.2979.75 as compared to the previous close of Rs. 2967.55. The total number of shares traded during the day was 136010 in over 15008 trades.

The stock hit an intraday high of Rs. 3130.05 and intraday low of 2942.8. The net turnover during the day was Rs. 410127237.

Source: Equity Bulls

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