D-Mart's Q4FY18 revenue, Ebitda and PAT growth of 22.5% y-o-y, 41.8% and 72.9%, respectively, came in line with our estimates. FY18 same-store sales growth (SSSG) at 14.2% was decent in absolute value but lower than expectations of 18-20% SSSG built in the numbers.
D-Mart’s Q4FY18 revenue, Ebitda and PAT growth of 22.5% y-o-y, 41.8% and 72.9%, respectively, came in line with our estimates. FY18 same-store sales growth (SSSG) at 14.2% was decent in absolute value but lower than expectations of 18-20% SSSG built in the numbers. Store expansion picked up in Q4FY18 to 14 stores, taking the store addition to 24 stores in FY18, though lower than the target of adding 30 stores. We keep estimates largely unchanged and maintain Hold with PT of Rs 1,370.
SSSG lower than expectations
FY18 SSSG of 14.2% was also impacted by GST led cut in prices of the end products — 200-250bps y-o-y impact on SSSG. Even considering this, we believe that SSSG was lower than expectations. We are witnessing increasing competition in grocery from Big Bazaar and Reliance Smart, which are also focusing on everyday low price to consumers similar to D-Mart.
Mix helped margins
D-Mart Q4FY18 gross and Ebitda margin expanded by 70bps y-o-y and 105bps y-o-y, respectively. Gross and Ebitda margins expansion during FY18 was 68bps y-o-y and 75bps y-o-y, respectively. Other expenses fell by 51bps y-o-y in Q4FY18 and 33bps y-o-y in FY18 helped by focus on driving cost efficiencies. Mix helped margins as the share of lower margin foods in revenue came down by 177bps y-o-y.
24 stores added in FY18
D-Mart added 24 stores during FY18, which is the highest number of store additions in a year since FY12. Store addition, however, remains lower than management’s internal expectations of 30. Management has cited store addition as one of the key challenges and focus areas for the company. Throughput/sq ft up 5%
Despite increased store additions and lower SSSG, D-Mart increased throughput per sq ft by 5% to Rs 32,719 (company reported), suggesting that the new stores are also coming at higher throughput per store. However, it needs to be seen if improvement in throughput can sustain with higher expansion going forward and entry into smaller cities where throughputs might be lower than Metros and Tier 1 cities.
Current valuations of 43x FY20e EV/Ebitda capture a blue sky scenario for the company, factoring in a strong double digit SSSG with sustained margin expansion for at least a decade, which, in our view, is difficult in grocery retail. Strong execution record and growth potential shall keep the valuations rich. We assign target EV/Ebitda multiple of 40x FY20e Ebitda to arrive at price target of `1,370 (factoring in 25% FCF CAGR for next 10 years). Upside risk: double digit SSSG and margin expansion on a sustainable basis for long term; downside risk: sharp dip in throughput per outlet.