Business model remains formidable; growth likely to rebound once Covid recedes; estimates cut; TP revised to Rs 3,430; ‘Buy’ maintained
DMART’s Q4FY21 earnings beat estimates by a wide margin: (i) DMART’s standalone sales/Ebitda/PAT grew by 17.9%/47.6%/ 51.6% y-o-y respectively. Sales was already guided in DMART’s Q4 operating statement (in April), while Ebitda/PAT beat consensus by a wide margin. (ii) Gross margin expanded by 117bp (implying revenue mix normalised) while lower rise in other expenses led to 170bp rise in Ebitda margin to 8.4% (on a benign base, since Q4 last was impacted due to COVID-19 wave). (iii) DMART opened 22 stores in FY21 (13 in Q4) and converted two stores into fulfilment centres for its ecommerce segment. Overall a strong performance, one that again highlights DMART’s business model has remained formidable despite the disruptions of FY21.
Q3 and Q4 beats increase conviction that disruptions are temporary: Even as (i) the second wave is disrupting, with c80% of its stores impacted due to reduced working hours and restriction on non-essential sales, the supply chain is in good shape. In fact inventory is in excess now (built up as normality was increasingly visible in Feb-March). (ii) DMART’s strategy has remained firmly intact: It has managed to maintain its pricing edge against most online retailers despite disruption and also upped its game of online delivery across key cities, so it is at least better prepared (having learnt from last year’s crisis). (iii) Withstood rise of online (led by COVID-19) well: Margin improvement in Q4 allays fears of margin erosion due to increased competition from e-retailers and reaffirms that its consumer franchise remains formidable. (iv) Stock has been resilient (down c12% from March peak vs c30% during first wave), and we believe that once COVID-19 fears subside, a strong revenue rebound is imminent. Last year’s base is benign which should support earnings growth. We pencil in FY22e revenue/PAT growth of 28%/56% y-o-y, respectively.
Its investment case rises above a few months of disruption: (i) Barring COVID-19, structurally, we see grocery retailing ($545 bn as of FY20-end, growing at c9%, while modern retail with just 4% penetration can deliver 2x growth rate) as a multi-decade opportunity. (ii) DMART has built a large scale, formidable consumer-centric business model with a clear strategy of low costs and best prices as its competitive edge and thrived in ‘trial by fire’ disruption. (iii) DMart’s presence is still nascent at 234 stores, and we expect network rollout to now accelerate from FY22; the network should more than quadruple in the coming decade, making revenue and PAT double every 3 years.
Retain Buy, TP Rs 3,430: We cut estimates (COVID-19 led) and roll forward valuation base, and stay Buy on DMART with a new TP of Rs 3,430 (from Rs 3,500 previously).