Jay Gandhi, Institutional Research Analyst, HDFC Securities.
Avenue Supermarts - Underlying profitability disappoints
Underlying profitability disappoints Higher bill sizes + lower footfalls aid FMCG profitability/productivity but are a sign of more targeted shopping with little room for discovery-based purchases (courtesy inflationary pressures), which in turn make a dent on the more profitable GM & apparel sales (constituted <25% vs a typical run-rate of 28%). Unit economics, consequently, remains below pre-pandemic levels. This pretty much sums up D-MART's Q2/H1 print. Revenue/EBITDA grew 20% each (3-year CAGR; EBITDAM 8.6% vs HSIE: 9.4%) while core capital employed grew at 23% CAGR. We suspect that heightened competitive intensity within D-MART's top districts may have had a role to play in lower sales density too. Maintain our SELL rating, with a DCF-based TP of INR2,950/sh, implying 34x Sep-24 EV/EBITDA for the standalone business + 4x Sep-24 sales for DMART Ready.
Q2FY23 highlights: Revenue grew 35.8% to INR103.8bn (3-year CAGR: 20.4%). Revenue/EBITDA per sq. ft came in at INR33.5k/2.9k per sq. ft (92/91% of pre-pandemic base). Management highlighted that elevated bill sizes (~INR1,870 in H1 vs ~INR1,226 in FY20) + lower footfalls (~75% of prepandemic run-rate; 108mn in H1) aided FMCG profitability/productivity but inflationary pressures impacted discretionary GM & apparel sales. Hence, gross margin at 14.5% remained sub-optimal (up 19bps YoY, HSIE: 15%). LFL growth (>5 year old stores) stood at 6.5% annualised (1H). EBITDAM declined 14bps YoY to 8.6% (HSIE: 9.4%) as other expenses were higher than expected. WC days have deteriorated from 22 days to 25 over three years, despite the essential-heavy mix, which turns faster. Hence, we suspect the deteriorating unit economics is not just a function of high inflation keeping discretionary purchases in check but also a consequence of a fair challenge to D-MART's value proposition by deep-pocketed peers within D-MART's top districts. Unutilised QIP money (~INR10.35/40.38bn) + C-WIP (~INR10bn) translates to one-year of expansion rope.
Outlook: DMART's unit economics remains sub-optimal vis-à-vis prepandemic days (partly attributable to the step-up in store additions/size). While we factor in a recovery for FY22-24, this assumption stands at risk, given the heightened competitive intensity from deep-pocketed retailers. Hence, we maintain SELL on DMART with a DCF-based TP of INR 2,950/sh, implying 34x FY24 EV/EBITDA for the standalone business + 4x FY24 sales for DMART Ready.
Shares of Avenue Supermarts Limited was last trading in BSE at Rs. 4138.30 as compared to the previous close of Rs. 4153.15. The total number of shares traded during the day was 13746 in over 2333 trades.
The stock hit an intraday high of Rs. 4197.00 and intraday low of 4111.10. The net turnover during the day was Rs. 57022421.00.