DMART Q1FY19 revenue (grew 26.7% y-o-y) was slightly ahead while Ebitda and PAT (grew 39.4% y-o-y and 43.4% y-o-y, respectively) came much ahead of estimates. 84bps y-o-y improvement in Ebitda margin was a positive surprise too in the light of mere 16bps y-o-y gross margin improvement and conservative management commentary. Despite best in class show, we remain on the sidelines as valuations keep risk-reward unfavourable. Maintain Hold with revised price target of Rs 1,470.
Topline: DMART revenues stood at Rs 45,594 million and saw 26.7% y-o-y topline growth coming on a high base of 35.7% y-o-y. SSSG is expected to be around mid teens. Everyday low price despite increased competition from both physical retailers and online retailers ensured strong show on topline.
Stores: Increased store addition aided overall growth as the company has added 26 new stores starting Q1FY18 to Q1FY19 end. Though only two new stores were added during Q1FY19, expect the same to pick up going forward.
Margins: Given increased competition, DMART has focused on giving best price to the consumer. Gross margins despite mix improvement improved mere 16bps y-o-y, highlighting value focus. Operational efficiencies and scale resulted in 59bps y-o-y dip in other expenses, resulting in 84bps y-o-y improvement in Ebitda margin to 9.3%.
Estimates: Given better macro tailwinds and improved efficiency benefits, we increase our topline and Ebitda estimates by 3/5% and 3.7/5.4%, respectively, for FY19/20.
View: Strong execution continues despite increased competition and given improved demand scenario, DMART remains the key beneficiary in the organised grocery retail space. Still current valuation of 43x EV/Ebitda FY20e captures the same, factoring 20% FCF growth till FY30, which will be difficult given margin expansion will only be gradual and maintaining the same level of throughputs for new stores might be difficult.