Avenue Supermarts Rating: Buy; Company to continue with winning ways

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April 18, 2020 5:15 AM

While Q1 will bear brunt of lockdown, FY21 earnings likely to be among best in consumer sector; TP up to Rs 2,800; ‘Buy’ maintained

We think DMART is still likely to deliver standout growth performance relative to our consumer coverage and the consensus’ bearish view based on the current lockdown is, in our view, short-sighted.We think DMART is still likely to deliver standout growth performance relative to our consumer coverage and the consensus’ bearish view based on the current lockdown is, in our view, short-sighted.

DMART’s recent operating update suggests that (i) post the implementation of the lockdown, only 50% of its overall stores are operational; (ii) driven by restrictions on customer movement, footfall is also much lower than normal; and (iii) the company continues to sell only essential items such as grocery and FMCG items and its retail area for general merchandise and apparel is closed within the stores.

What this means for the operating performance: (i) While the footfalls are lower, consumers tend to buy two to three times the average basket to avoid coming to stores frequently; (ii) on our estimate, the combined effect is likely to result in c16-17% revenue growth in Q4 (lower than trajectory of 23-24% y-o-y growth); and (iii) a more drastic impact on revenue growth is likely to be in Q1, which is likely to decline by 11% y-o-y, gradually recovering in Q2 and rebounding in Q3, leading to full-year revenue growth of 14.4%. We think DMART is still likely to deliver standout growth performance relative to our consumer coverage and the consensus’ bearish view based on the current lockdown is, in our view, short-sighted.

DMART will continue with its winning ways: (i) DMART stands out in terms of its consumer centricity and even amid the disruption caused by the COVID-19 outbreak, its discounting remains as aggressive as it was before, with product availability on shelves highlighting its sharp execution and efficient supply chain; (ii) DMART, having completed its QIP recently, is sitting on ample liquidity and, in our view, will be in a favourable position to fuel its store expansion in a cost-effective manner, which is likely to be less appreciated in the context of the lockdown narrative; and (iii) given its low fixed costs and low-cost operating model, we expect DMART to deliver among the best earnings results in the consumer sector in FY21.

Maintain Buy: Despite the near-term slowdown, DMART’s long-term investment case remains compelling, driven by multi-decade growth opportunities in the modern grocery retail where DMART, with its focus on value retailing and low cost approach, has a winning business model, in our view. We tweak our estimates but increase our long-term growth rate estimate, which (along with our new COE) results in our new TP of Rs 2,800 (from Rs 2,300).

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