FY20/21e Ebitda up 3/6%; risk-reward balanced post-correction; upgraded to ‘Hold’ with TP up to Rs 1,430.
DMART delivered a slightly below 26.8% y-o-y topline growth in Q1. However, Ebitda margins were up 70 bps y-o-y driven by 50bps y-o-y gross margin expansion. New store openings (8 in Q1) improved compared to FY19 (21 in full year). We expect FY20 to see an improvement in growth profile driven by margins bottoming-out and higher new store openings. While valuations are still rich (55x FY21 PE), risk-reward is now balanced post correction. Upgrade to Hold.
Topline grew 26.8% y-o-y
Topline grew 26.8% y-o-y on a base of 26.7% y-o-y growth in Q1FY19. We estimate SSSG of 15% y-o-y which is slightly below FY19 average of 18%. The consumer demand environment remains soft which might keep SSSG muted in 1HFY20 but the company still continues to grow strongly helped by the ‘Everyday Low price’ proposition. Competitive intensity remains high in grocery but seems to be stabilising post a spurt in FY19.
New store openings
The company opened 8 new stores in Q1FY20 (vs 2 in Q1FY19 and 21 in entire FY19), which was helped by spillover of new store openings from PY due to a delay in approvals. We build in 30 new store openings in FY20 and FY21 post a muted FY19. The company added 0.4mn sq ft of retail space in Q1.
LTL Ebitda margins up 70bps y-o-y
Gross margins expanded 50bps y-o-y to 16.1%, the highest in 6 quarters. Apart from perhaps a better product mix, this could also be due to some signs of stabilisation in competitive intensity. Employee costs were down 10bps y-o-y. While reported Ebitda margins expanded 100bps y-o-y to 10.3% due to lower other expenses (down 50bps y-o-y) helped by the adoption of IAS 116, LTL Ebitda margins were up 70bps. Given higher depreciation and interest expense post IAS 116 adoption, PAT was up 33.5% y-o-y vs 41% y-o-y growth in reported Ebitda.
We maintain our SSSG estimate of 15% CAGR over FY19-21. We largely maintain our LTL Ebitda margin expansion at 40bps over FY19-21 leading to Ebitda upgrades of 3%/6% in FY20/FY21.
View and PT
DMART’s execution remains best-in-class with a focus on driving volumes through providing a superior price-value equation to consumers and driving strong cost efficiencies. While rich valuations (55x FY21 PE, 32.5x EV/Ebitda) still limit upside potential, the improving earnings growth profile, coupled with 20% stock price correction in last 12 months, make risk-reward balanced now. Our revised PT of `1,430 is based on 33x Mar 21 Ebitda, at a 25% premium to our broader consumer coverage universe given its superior growth profile (30% Ebitda CAGR for DMART vs 15% for sector). Historical multiples not relevant given limited trading history.