DMART continues to execute strongly in discount grocery retailing with cost leadership helped by strong efficiencies. We continue to expect a higher new store opening trajectory ahead and margins to remain range-bound with upward bias at 8.5-9% levels after a decline in FY19 to 8.2%.
DMART reported a largely steady Q2 with revenue growth at 22.1% y-o-y and 70bps reported Ebitda margin expansion (30bps LTL) resulting in 21.3% y-o-y PBT growth. Revenue growth trajectory slowed down given high base and we estimate SSSG to be ~10-11% y-o-y. New store addition was 5 in Q2 (13 in 1H). While execution remains strong and earnings trajectory remains robust given margin uptick, recent sharp run-up and valuations at 65x FY21 PE limit upside. Maintain Hold.
Net sales up 22.1% y-o-y
Revenue growth was muted given the high base of Q2FY19 and partially due to slowdown impact, in our view. We estimate Q2 SSSG at ~10-11% y-o-y which is still healthy in the current consumption environment and given the high base (revenue/sq ft at Rs 35,647 in FY19) but decelerating from higher levels seen in the past (FY19 SSSG at ~17.8%).
New store addition at 5 in Q2
The company ended Q2FY20 at 189 stores (addition of 5 stores in Q2) taking total retail area to 6.5 mn sq ft. We expect 16 store additions in 2HFY20 to take total new store additions to 29 in FY20. 1H has seen improvement in new store trajectory on y-o-y basis.
Ebitda margins up 70bps y-o-y to 8.7%
Gross margins improved 80bps y-o-y continuing the Q1FY20 trend when they improved 60bps y-o-y. Stabilisation of competitive intensity and better product mix has helped gross margins. Employee costs/sales were up 10bps and LTL other expenses up 30bps y-o-y.
Balance sheet and subsidiaries showing
Inventory and payable days were up by 4 and 3 days resp, resulting in core working capital remaining steady in ~5.5-6% of sales range. Subsidiaries’ performance was largely on expected lines with revenues of Rs 418 mn and PBT loss of Rs 87 mn.
We tweak our revenues and Ebitda estimates (revenue cut by ~2-3% and margins upped ~30bps) for FY20/FY21 to reflect overall consumption trends. PAT and EPS estimates increase by ~15% to reflect a lower corporate tax rate.
Our view and Target Price
DMART continues to execute strongly in discount grocery retailing with cost leadership helped by strong efficiencies. We continue to expect a higher new store opening trajectory ahead and margins to remain range bound with upward bias at 8.5-9% levels after a decline in FY19 to 8.2%. With recent tax cuts and roll over to Sep 21 PT, our revised PT is Rs 1,670. Our PT implies ~60x FY21 PE and ~50x FY22 PE. The recent sharp upward move in the share price (up ~30% in the last 3 months) makes risk-reward less compelling over the next 12 months.