Avenue Supermarts - Underlying profitability disappoints - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

Revenue grew 24.7% (three-year CAGR: 18.7%), while sales density remained lower than the pre-pandemic level (~INR35.9k/sq. ft vs INR38.7k/sq. ft in Q3FY20; in-line). Low discretionary purchases keep underlying profitability/unit economics subdued. FMCG/staples continued to outpace the GM & apparel category. Consequently, gross margin pressures continued (14.3%; -60bps YoY; vs HSIE: 15%). EBITDAM followed suit (-96bps YoY at 8.6%; HSIE: 9.3%). We suspect heightened competitive intensity within D[1]MART's top districts may have had a role to play in lower sales density and share loss in non-discretionary categories. We largely maintain our estimates and retain SELL, with a DCF-based TP of INR3,000/sh, implying 34x Dec-24 EV/EBITDA for the standalone business + 4x Dec-24 sales for DMART Ready.

Q3FY23 highlights: Revenue grew 24.7% to INR113.04bn (three-year CAGR: 18.7%). Revenue/EBITDA per sq. ft came in at INR35.9k/3k per sq. ft (93/91% of pre-pandemic base). Management highlighted FMCG/staples continued to outpace GM & apparel categories. Discretionary non-FMCG sales fell short of expectations too. Consequently, gross margin pressures continued (14.3%; - 60bps YoY; vs HSIE: 15%). EBITDAM followed suit (-96bps YoY at 8.6%; HSIE: 9.3%) as the cost of retailing was largely in line. Store expansion also fell short of expectations. DMART added only four stores in Q3 (store count: 306). Channel checks suggest DMART's weaker unit economics (than usual) 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. DMART expanded its e-comm operations to four new cities (present now in 22 cities).

Outlook: DMART's unit economics remains sub-optimal vis-à-vis the pre-pandemic days (partly attributable to the step-up in store additions/size). While we factor in recovery over 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 3,000/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. 3678.65 as compared to the previous close of Rs. 3862.20. The total number of shares traded during the day was 78247 in over 13150 trades.

The stock hit an intraday high of Rs. 3751.45 and intraday low of 3627.00. The net turnover during the day was Rs. 288540023.00.

Source : Equity Bulls

Keywords

AvenueSupermarts INE192R01011 DMART Q3FY23 HDFCSecurities