PAT CAGR of 25% expected over FY20-23e; valuation’s attractive given prospects; initiated coverage with ‘Buy’ and TP of Rs 3,100
By Axis Securities
DMART’s strong execution capability with a stellar execution track record, places it on top of the list among all Food & Grocery (F&G) retail players. Tested business model with consistency in providing highest discounts on a profitable basis helps DMART to outperform competition. The company has ramped up its store expansion and its cluster based expansion aids in trimming costs and supporting margins. DMART has delivered strong growth with a CAGR of ~36%/40%/47% in Revenue/Ebitda/PAT respectively, over FY12-20.
We expect it to deliver a CAGR of ~23%/24%/25% in Revenue/Ebitda/ PAT, respectively, over FY20-23e on account of: (i) Value retailing (consistency in providing discounts) remains the primary moat; (ii) low cost of operation (majority of the stores are company owned); (iii) continuous store expansion through a cluster based approach; (iv) healthy SSSG and balance sheet with no liquidity constraints; (v) superior return ratios despite heavy investment in assets.
At CMP, the stock trades at 41x EV/Ebitda on FY23E earnings (3-year avg EV/Ebitda is 54x), which we believe is attractive given the strong revenue growth over FY20-23e with large headroom for expansion going ahead. We are initiating coverage with Buy and a TP of Rs 3,100 (48x FY23e EV/Ebitda) which implies 16% upside from the current levels.
Value retailing remains the primary moat: Despite larger revenue dominated by food and grocery business coupled with thin margins (8.6% Ebitda margin), DMART provides lowest cost offerings to customers consistently, in turn gaining loyalty, a key factor for driving footfalls. DMART has maintained the lowest execution cost aided by a cluster-based expansion strategy, lowest operation cost among peers by outsourcing ~80% employees and minimal rental cost and optimum working capital with the timely payment of payables reaping higher cash discounts.
Large headroom for expansion with focus on D-Mart Ready: The company has a strong presence in southern and western regions which majorly contribute to the revenues. It has established an extensive cluster-based distribution network comprising 220 stores and ~225 DMART Ready stores as of Q2FY21. We expect it to add ~100 stores till FY23e with ~80% of the stores in the existing clusters and ~20% would be new clusters for which it raised Rs 4,000 crore through QIP in FY20.
Strong balance sheet and return ratios: Despite capital intensive strategy, the company has sustained an average ROE and post tax ROCE of 15%+/13%, respectively, which are expected to be maintained. It has maintained healthy operating cash flows, asset turns (~5x) and Ebitda margins over the years. Its B/S remains strong and comfortable with Net Debt/Ebitda and Net Debt/Equity of -0.05x/ -0.01x respectively in FY20.
Robust long-term growth outlook: We believe DMART is well placed in the domestic retail industry given its strong execution capabilities, disciplined EDLP/EDLC strategy, lower cost of operation and streamlined distribution network aiding penetration into newer markets.