Analyst Corner: ‘Sell’ with fair value of Rs 3,080 for Avenue Supermarts

By: |
October 19, 2021 8:23 AM

Store additions will continue to gather pace as construction activity recovers. We believe the stock is pricing in aggressive revenue growth with no margin dilution

dmart, Avenue SupermartsStore additions will continue to gather pace as construction activity recovers.

2QFY22: good recovery in revenues: Dmart posted 2QFY22 revenue growth of 46.6%/52% yoy/qoq as lockdown restrictions eased. EBITDA of Rs 6.7 bn was 4% below estimates due to lower GM of 14.3% as a result of weaker-than-expected general merchandise sales. Store additions will continue to gather pace as construction activity recovers. We believe the stock is pricing in aggressive revenue growth with no margin dilution. SELL with fair value of Rs 3,080.
Healthy 47% yoy revenue growth on account of easing lockdown restrictions: Dmart reported 2QFY22 standalone revenues of Rs 76.5 bn, implying revenue growth of 46.6% yoy and 52% qoq. Revenue growth was on expected lines as the second Covid wave lockdown restrictions were eased during the quarter, leading to normal-isation of store operations and footfalls. Two years and older Dmart stores (~187) grew by 23.7% yoy in September 2021 although this should be viewed in the context that the base quarter was not normal. Overall, recovery in revenues indicates that footfalls are resuming to near-normal levels and that new stores are ramping up well.

Weaker-than-expected general merchandise sales affect gross margins: GM declined 194 bps qoq to 14.3% but was 80 bps lower than expected due to limited contribution of general merchandise. Lower GM drove a 34 bps miss in EBITDA margin and consequentially 4% miss in EBITDA. In an earlier update, the company had highlighted that several stores were restricted to sell non-essential products on certain days of the week or for a continuous period in 1QFY22. We believe some of it might have continued in 2QFY22 as well, leading to weaker-than-expected GM.
Store expansion to accelerate in FY2022; Dmart Ready expands further: Dmart opened eight new stores in 2QFY22, taking total store count to 246. It has added 12 stores in 1HFY22 (vs six stores in 1HFY21; 13 stores in 1HFY20) and we expect store additions to accelerate in 2HFY21 as is normally the case. We bake in 35 new store additions each in FY2022 and FY2023. The e-com-merce business (Dmart Ready) contin-ued to expand; it launched operations in Surat and Vadodara, taking up the total number of cities with Dmart Ready to seven. We note that the pace of expan-sion of Dmart’s e-commerce business has recently picked up, indicating management’s focus to capture the underpenetrated e-grocery space.

Revenue recovery a positive; stock price baking in aggressive revenue increase: Our FV of `3,080 incorporates `600 value to Dmart Ready. It also bakes fairly aggressive assumptions of 2,049 store count by FY2050 with no margin dilution and steadily improving RoCE. SELL.

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