In our view, we are still midway in the evolving high-growth compounding construct; investor should continue to stay positive on Dmart.
Dmart Q2FY22 sales substantially ahead: Dmart’s Q2 operating statement suggests that: 1) standalone sales grew 46.6% y-o-y (c29% over normal quarter Q2FY20), significantly above our expectation; 2) Dmart added net eight stores in Q2, taking the total store count to 246; and 3) in our view, the sustained recovery momentum suggests, despite being largely on offline retailer, how resilient Dmart’s value retailing business model is.
Given the stock’s run-up in the past one year (up 94% vs Nifty50’s gain of 54%), the key questions for investors are whether the valuation (106x FY23e PE) is ahead of fundamentals and whether there is a risk of de-rating. In our view, we are still midway in the evolving high-growth compounding construct; investor should continue to stay positive on Dmart.
We think Dmart has a compelling investment case: 1) Logic of owning Dmart for the long term is clear, in our view. Given the size of the grocery market (c95% dominated by “mom and pop” stores), value retailers, such as Dmart, potentially can have 10x more stores than at present. This significant growth opportunity will likely run into multiple decades. 2) Dmart’s focussed strategy of pricing as its competitive edge and driving profits through scale and the pursuit of lower costs, makes it a formidable business model to capture this value for the long term. 3) We see the beginning of an exceptional growth phase: driven by the pace of the network roll-out and the revival of in-store demand (we pencil in revenue growth of c46% in FY23e) and a decade of potential high growth with a revenue CAGR of 26-27%, even in subsequent decades DMART has the potential to grow in mid-teens.
4) Perceived expensiveness is misleading and is merely a reflection of the “long duration of growth capture” the market is willing to assign and price in for winning business models, such as Dmart. 5) Unique compounding construct: In our view, given its long-term appeal, Dmart in the current market context will act like a defensive stock, if the market sees volatility, and will continue to outperform, if the bull phase of the market continues.
Reiterate Buy with a new DCF-based TP of INR5,500 (from INR4,000), as we revise our long-term growth rates, lower our cost of equity (led by a decline in beta) and roll forward our valuation.