Avenue Supermarts Ltd. share price target

Store expansion plan suffers (just 2 added in 1QFY21), will impact FY22/23 D'Mart 1Q21 shows full impact of COVID19 with lower footfalls, higher cost of operations and restrictions on sale of non-essentials. However, being positive at EBIDTA and PAT level shows the resilience of business model with little rentals and interest cost. Although recovery of 80%+ of pre-Covid sale...

For FY20, revenue growth marginally tapered down to 24% YoY to | 24870.2 crore. Growth was mainly driven by aggressive store addition pace in FY20. DMart added record 38 stores (1.9 mn sq ft addition) taking total store count to 214 stores spread across 7.8 mn sq ft. The company continued to add larger stores with average sq ft of ~50000 (vs. average runrate 30000 sq ft.). Same store sales (SSSG) growth dipped to 10.9% vs. 17.8% in FY19. SSSG for matured stores (>five years) slowed down whereas new stores are peaking at faster clip (even before they qualify for 24 months SSSG calculations). EBITDA margins (adjusting for Ind-AS 116)...

Avenue Supermarts (DMART) reported better than expected result. Strong performance in the month of Jan'20 and Feb'20 was offset by moderate performance in Mar'20. Operating profit margins contracted due to higher discounting and revenue loss in high-margin-accretive GM and apparel business during lock-down in Mar'20. Absenteeism of staff due to COVID19 fear is a major cause of concern. DMART rolled out incentive (hardship allowance) and safety driven measure to win-back employees. Recovery in revenue during first 2 weeks of May'20 at +17% over Apr'20 (-45% YoY) is encouraging but significantly below normal levels. We believe, FY21E will be very...

25 May 2020 10.9% SSSG and a strong 18 store additions drove 24% YoY revenue growth (in- line) in FY20. However, the company reported a big 22% miss on EBITDA with 4% YoY growth. We have cut our EBITDA estimate by 16.8% for FY21E due to 50% of stores being closed over AprMay20, lower gross margins from increased non- discretionary revenue, and higher opex. However, we maintained our FY22E EBITDA estimates given the sharp recovery expectation as it pertains to non- discretionary. DMARTs consolidated revenue grew 24% YoY to INR63b (down 8% QoQ, 4% above est.) on account of sales of only essential products at DMART stores. In Mar20, revenues grew only 11% YoY (v/s Mar19) due to the lockdown effect witnessed in the nine days of Mar20. Hence, implied revenue growth over JanFeb20 is ~30%. For FY20, revenue/EBITDA grew 24%/8.1% to INR249b/INR20.2b with flat EBITDA margin at 8.1%.

Stoppage of construction to impact store openings in FY21. We are cutting FY21 and FY22 EPS estimates of D'Mart by 16.8% and 8.1% due to 1) Lockdown impact on footfalls/sales 2) higher cost of operations 3) delay in store openings and safety cost. Although worst seems over given MOM improvement in May sales, expect near term margins to suffer due to...

Extended lockdown drives estimates/TP downgrades for FY21/22E: Despite sharp correction in retail stocks, we see few value buys as for most, price performance is reflective of reduction in earnings power, esp. in apparel. (EBITDA cuts for FY21/FY22 range from -14 to 57%/-7-30% across universe). Subsequently TP cuts across universe range from -6 to -42%. We maintain our BUY rating on V-MART & ABFRL and SELL rating on D-MART. Impact of Covid-19 and FY21 template: Retail is likely to be among the worst hit sectors by COVID-19. Revenue declines across coverage is likely to range between 3-14% in 4Q. Impact on profitability (EBITDA) will be even higher (-14% to severe losses in FY21 ex-DMART) given the high fixed cost base in biz models. In this backdrop, Assessing 1. Foregone vs recoverable revenue, 2. Inventory fungibility/quality across seasons, 3. Capital to cover fixed costs and 4. Leverage position will assume centre stage.

Accordingly, DMART should see 65-70% impact on its monthly revenue during the shutdown. Further, once the lockdown is lifted, the non-essential 30% product sales (which also include 10% apparel sales) may take some time to recover, as these are part of semi- discretionary products. The pace of store addition is also estimated to reduce from 28 to ~10 in FY21E. DMarts average cost of retailing is ~6-7% of stable state revenues, i.e. Thus, during the lockdown when sales impact is 65-70%, DMart could incur monthly EBITDA loss of ~INR400m, after factoring in 15-20% cost reduction due to opex savings from closed stores. Post lockdown, we expect swift revenue recovery given that 70% of DMarts business caters to the essentials category, against other apparel retailers, which may see severe impact. However, there could be some impact due to (a) 30% non-essential sales, and (b) lower new store addition in FY21.

Avenue Supermarts Ltd (DMart) owns & operates India's most profitable supermarket, DMart. It provides products like Food (51%), Non-Food (FMCG-20%), General Merchandise & Apparel (29%) through 196 stores (total 6.97mn sq. ft as of Dec 2019). We believe the lockdown on account of COVID19 pandemic has impacted the industry through disruption in supply-chain, decline in footfalls and shortfall in workforce. However, the essential nature of products (51% is food category...

Avenue Supermarts Limited is an India-based company, which owns and operates D-Mart stores.

Avenue Supermarts (DMART) reported better than expected result led by continuance of strong retail expansion rate and better revenue mix. DMART continues its strategy of opening bigger size stores which presents more opportunity (i.e. more retail area) to retail high-margin general-merchandise and apparels where-in competition from leading online grocery retailers (like Grofers and Big Baskets) are conspicuously absent. This has aided in gross margin expansion despite discounting intensity rising to its peak. Ability to maintain gross margin through intelligent product-assortment strategy continues to justify the valuation-premium which DMART commands. We have...