Avenue Supermarts’ Q1 earnings beat estimates: (1) Dmart’s standalone sales/EBITDA/PAT grew 95/356/490% y-o-y (19.3/19.1/26.6% 3yr CAGR), respectively. Sales were already guided in Dmart’s Q1 operating statement; EBITDA/PAT beat consensus expectations by 12%/15%, respectively. (2) Gross margin jumped to 15.8% driven by better traction in the high-margin discretionary segment in a seasonally better quarter due to back to school/college season and the onset of the monsoon season. EBITDA margin expansion was even higher at 588bp y-o-y to 10.3%. Both gross margin and EBITDA margin were the highest they have been over the past 12 quarters.
(3) Dmart opened 10 stores in Q1, taking its total store count to 294 stores with 12.1m sq. ft. in retail business area. Newer, larger capacity stores added over the past three years did quite well in the quarter. (4) Dmart continued to deepen its e-commerce business ‘Dmart Ready’ across the 12 larger cities in which it has a presence, with pilots in smaller towns.
What supports our Buy rating: (1) Strong Q1 results indicate that footfall normalisation is underway, which bodes well for the rest of the year, driven by pending recovery in non-food discretionary sales, whose contribution to the sales mix is still below pre-pandemic levels. Consensus, in our view, is too conservative – we pencil in above-consensus revenue/EBITDA growth of 50/70% y-o-y for FY23e. (2) As a hard discounter, Dmart’s appeal rises as consumers look to economise on their budget, thus offering Dmart a tailwind in revenue growth. (3) Driven by the accelerating pace of network rollout (opened 50 stores in FY22), and recovery in same-store sales growth, we see the potential for a 10-year revenue CAGR in excess of 20%.
(4) Given the size of the grocery market (c95% dominated by “mom and pop” stores), hard discounters such as Dmart could easily have as many as 10x more stores than now. Hence, the network-led penetration opportunity offers a secular growth opportunity for a long time.
(5) Dmart’s share price implies c14% long-term earnings CAGR, which is well within what we think it can deliver.
Maintain Buy with unchanged target price of Rs 6,000: We make minor adjustments to our estimates post the company’s Q1FY23 results. The changes have no impact on our fair value target price of Rs 6,000. The rollout of larger capacity stores, footfall recovery, and discounting supports growth. A key downside risk is a new outbreak of COVID-19.
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