Avenue Supermarts’ (DMart) 2Q sales growth came in below estimate, with sales per store up 5. We believe 2Q SSS growth was c12-14%. Ebitda growth and in turn PAT growth came in above estimates, as likely improvement in product mix drove 70 bps expansion in Ebitda margin to 9.1 %.The company added four stores (vs. 1 store in 1Q), taking retail area to 4.2m sq ft. Working capital expanded from FY17 levels to 24 days on the back of higher inventories. The promoter, Radhakishan Damani, has joined the management as “Chief Mentor”. We upgrade FY18/19/20 EPS estimates by 5 % each, to factor in the 2Q beat. However, we see limited margin of safety at current valuations (42x FY19 EV/Ebitda) for potential disruption from increasing competition, change in consumer behaviour, and physical store-level constraints. We maintain Reduce with TP of Rs 1,000.
Avenue Supermart Ltd (D-Mart) is an emerging supermarket chain with a presence in 45 cities across India. It’s major presence is in the states of Maharashtra, Gujarat, Telangana and Karnataka. D-mart opened its first store in 2002 and it has 136 stores at present with a retail business area of 4.2mn sq ft. D-Mart operates most of its stores in densely located areas and focuses on customers in the lower and middle class segment of the society. D-Mart provides lower prices for its products across various categories and sub-categories which is appealing to the price sensitive section of the society. In order to minimize operational costs, the company follows an ownership model (including long term lease contracts where lease period is 30+ years) rather than a rental model.