High capex and moderating revenue growth could crimp return ratios and compress the stretched valuation multiples. Retain Sell with unchanged estimates.
DMART delivered another strong quarter in a consumption slowdown context, albeit with an in line but a decelerating revenue growth print. High capex and moderating revenue growth could crimp return ratios and compress the stretched valuation multiples. Retain Sell with unchanged estimates.
Slowing growth but margin reset cycle behind: DMART’s standalone Q3FY20 revenue/Ebitda/PAT grew 24%/ 26%/55% y-o-y to Rs 67.5/5.7/4 bn (pre IND-AS 116 basis).
9MFY20 revenue/ Ebitda/PAT grew 24%/30%/ 47%. Footprint addition was a healthy 9% y-o-y in Q3FY20; the company added 7 stores/ 0.47m sqft. 9MFY20 saw addition of 20 stores (v/s est. 26 stores for FY20). Revenue growth in Q3FY20/9MFY20 has slowed considerably compared to 33% each in the corresponding year-ago period. For 9MFY20, our same store sales growth (SSSG) estimate was in low double-digit (v/s 18% in FY19). Ebitda at Rs 5.7 bn grew 26% y-o-y (in-line) while Ebitda margin expanded 20bp to 8.5%.
Strong store adds to push growth, but ownership model may expand BS: Although DMART’s pace of store addition remains healthy, weak consumer demand is evident from the slowing SSSG, which could drag earnings. Additionally, we expect stable margins with limited room for operating leverage due to (i) slowing SSSG, and (ii) passing on of cost efficiencies. Our FY20/FY21/FY22 revenue growth estimate stands at 24%/31%/22%. DMART’s capex/sqft has increased continuously in the last 4 years and has doubled to ~Rs 12,000/sqft, which along with slowing SSSG could impact its return profile.
Valuation and view: DMART’s robust execution on core retail operating parameters in an environment of consumption slowdown is quite impressive. This has ensured strong valuation re-rating in the last three years since its listing and resulted in massive outperformance vs. market and other Retail peers. Therefore, the relative moderation in revenue growth coupled with high capex could impact DMART’s return ratios and could compress valuation multiples in our view. Valuations at 54x FY22 P/E and ~35x FY22 EV/Ebitda are expensive and provide no margin of safety. Maintain Sell with target price of Rs 1,700.