Nationwide lockdown led to store closures and the restriction of sales to the Essentials category. As a result, revenue witnessed a 34% drop and estimated same-store sales growth (SSSG) fell -55%; the closure of the margin-accretive non-food section dragged down gross margins by ~220 bps, translating into 81% y-o-y decline in Ebitda.
Our channel checks with vendors indicate healthy recovery trends in SSSG, albeit still in the negative single digits, but ~20% of stores remain closed in the western region. We broadly maintain our Ebitda estimate, building recovery in H2FY21.
Negative SSSG, low GM hurt earnings
DMart’s consolidated revenues fell 33% y-o-y to Rs 39 bn (6% below est.) on sales of mostly essential products witnessed at DMart stores and many stores remaining shut in the initial phase of the nationwide lockdown. Gross profit fell 42% y-o-y (in line) and gross margins (GM) contracted 220bps y-o-y to 14.2% (90bp below estimate). This is attributable to the high-margin General Merchandise and Apparel sections of retail stores being closed and stores in some areas (with high local restrictions) continuing to operate sales only for essential items.
Other expenses came in higher by 22% y-o-y to Rs 3.1 bn (18% above est.). Subsequently, loss of Rs 3 bn in gross profit directly impacted Ebitda, which fell 81% y-o-y to Rs 1.1 bn (28% below est.); Ebitda margins contracted 740bps to 2.9%. PAT declined 89% y-o-y to Rs 401 m (11% miss) and PAT margins stood at 1%.
Stricter restrictions, 2nd phase of lockdown could extend COVID-19 impact
DMart opened two new stores in Q1FY21, taking the total store count to 216. Management stated that unlike the developed countries where organised retailers saw major customer traffic even in lockdown, this has not been witnessed with the same intensity in India. This is attributed to the enforcement of store shutdowns and restricted movement on account of social distancing rules. Traditional trade (local neighborhood stores) made a roaring comeback and has successfully served the needs of anxious customers. Value offerings and discounts appear to lack priority among consumers during the lockdown, which is hurting the hypermarkets.
Discretionary consumption continues to be under pressure, especially in the non-FMCG categories. Our channel check suggests this is down 25% for like-to-like (LTL) stores.
Valuation and view
Grocery retailers catering to Essentials are seeing a lower impact of the lockdown. DMART’s non-discretionary revenue contributes ~72% to total sales (FY20). The company’s equity funding of Rs 40 bn in Q4FY20 strengthened the balance sheet with net cash position.
Nevertheless, our channel checks suggest Jul’20 is being impacted by the second phase of lockdown, with nearly 20% of stores being closed once again. Thus, there is risk of slow recovery, which could extend well beyond H1FY21.
We value D-Mart at an FY22e EV/Ebitda multiple of 42x, maintaining TP of Rs2,000 (20% discount to the three-year average EV/Ebitda multiple of 53x). This still implies a 14% downside. Maintain Sell.
