Note from Avenue Supermarts: Reduce – A stable performance in the third quarter

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The activity mix is ​​again impacted; given the pace of recovery, Ebitda FY22e down 3%; TP revised to Rs 3,966; ‘Reduce’ retained given the valuations

Avenue Supermarts (DMart) posted an online performance in Q3FY22 despite a slight loss in gross margin (14.9% vs. 15.1% estimated; Q3FY20: 15%). Other Highlights: (i) The sales recovery – disclosed earlier – of 91% (on revenue/sq.ft.) lagged our initial expectation of a 100% recovery. (ii) Store additions (17 in Q3FY22) are on track to achieve the target of a total of 60 in FY20–22. (iii) Mgmt pointed out that GM & Apparel systematically contributes less to the mix. (iv) No incremental updates on DMart Ready.

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Given the pace of the recovery, we are reducing FY22e revenue/EBITDA by 3%. This, coupled with a carry to T1FY24e, results in a TP of Rs 3,966 (65x EV/Ebitda; Rs 3,738 earlier). Keep ‘Reduce’.

Ebitda margin in line with estimates; business mix impacted again
DMart reported self-sustaining revenue growth of 22% YoY (up 19% YoY). For Q3FY22, the overall recovery (based on revenue/square foot) was 91% of Q3FY20. Gross margin was slightly lower at 14.9%. Mgmt commented that the general merchandise and apparel business consistently makes a relatively weak contribution to sales, while essentials and consumer staples are doing better.

Based on the commentary, we expect a larger impact on the apparel and footwear sub-category within GM & Merchandise. DMart was able to control expenses, resulting in Ebitda margin at 9.7% in line with estimates.

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Stocks more robust
Store additions accelerated with the addition of 17 stores / 0.9 million square feet, one of its largest additions in a quarter and DMart’s largest addition since Q4FY20. The company added 29 stores overall for the year and is on track to meet its target of 60 additions (over FY20-22). Additionally, the trend of increasing store size continued, with the average size of new stores being 50,600 square feet. (average: 39,000 square feet). Revenue for the DMart subsidiary, a partial indicator of DMart Ready, jumped 40% YoY/10% YoY. The subsidiary’s gross margin, however, fell 340bps QoQ, but Ebitda margin remained flat QoQ. Its losses widened qoq from Rs 311 mn to Rs 333 mn in Q3FY22.

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Perspectives: opportunity taken into account
We are reducing FY22e revenue/EBITDA by 3%. Our estimates for the 23/24 financial year remain unchanged. We continue to value DMart at 65x EV/Ebitda but postpone the valuation to Q1FY24, resulting in a revised TP of Rs 3,966 (Rs 3,782 earlier). Hold ‘Reduce’.

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