Avenue Supermarts Ltd. share price target

13 January 2020 DMART delivered another strong quarter in a consumption slowdown context, albeit with an inline but a decelerating revenue growth print. High capex and moderating revenue growth could crimp return ratios and compress the stretched valuation multiples. DMARTs standalone 3QFY20 revenue/EBITDA/PAT grew 24%/26%/55% YoY to INR67.5b/INR5.7b/INR4b (pre IND-AS 116 basis). Footprint addition was a healthy 9% YoY in 3QFY20; the company added 7 stores/0.47m sqft to reach a total of 196 stores/6.97m sqft area. 9MFY20 saw addition of 20 stores (v/s est. Revenue growth came in at 24% each for 3QFY20/9MFY20, but has slowed considerably compared to 33% each in the corresponding period. For 9MFY20, our same store sales growth (SSSG) estimate was in low double- digit (v/s 18% in FY19). Gross profit was up 26% YoY at INR10.

Avenue Supermarts Ltd (DMart) owns & operates India's most profitable supermarket, DMart. It provides products like Food, Non-Food (FMCG), General Merchandise & Apparel through 196 stores (total 6.97mn sq. ft). Q3FY20 revenue grew by ~24%YoY and PAT grew by 53%YoY. Strong PAT growth was on account of reduction in corporate tax and improvement in margins. Gross margin expansion continued for the last 3 quarters (30bps in Q3FY20). DMart added 7 stores in Q2FY20, above expectation. Total 20 stores...

We remain sellers on the counter as we believe 1) D-MART's throughput, cost and working capital efficiencies are near peak. 2) Cost of retailing is inching up. 3) Well capitalized e-grocers/online biggies (Amazon /Flipkart) are getting price-war-ready as can be seen from the significant bump up in their authorized capital. (This could increase cost of retailing in general for the industry over the medium to long term as offline retailers may be arm-twisted into taking fulfillment cost on their books not factored in). We largely maintain our estimates/TP and we bake Revenue/EBITDA/LTL APAT CAGR of 26/30/30% CAGR over FY19-22 and currently have a DCF-based TP of Rs. 1,250/sh, implying 24x Dec-21 EV/EBITDA. Stock currently trades at 42/34x FY21/F22 EV/EBITDA. While D-MART posted healthy growth in 3Q, the pace of growth has come off consistently over 9MFY20 courtesy 1. A heavier base, 2. Ever-heightening competitive intensity. What is more worrying is the dip in the anchor variable - sales velocity (revenue per sq. ft) over the last 9m partly due to larger-sized stores. This certainly warrants a closer look to assess how close is D-MART to its peak on throughput, cost and working capital efficiencies.

Top-picks: V-MART (BUY), Avenue Supermart (SELL). 3Q was marred by multiple footfall dampeners - 1. Weak consumer sentiments, ergo weak volume off-take, 2. Socio-political protests (CAA & NRC-led), 3. Competitive intensity continued to heighten (especially across food & grocery and apparels).

Avenue Supermarts Ltd (DMart) owns & operates India's most profitable supermarket, DMart. It provides products like Food, Non-Food (FMCG), General Merchandise & Apparel through 189 stores (total 6.5mn sq. ft). We downgrade to HOLD due to limited upside and premium valuation....

Avenue Supermarts (DMART) reported below expected result on EBITDA and PAT front. This was largely due to higher than expected other expense and effective tax rate. Expansion in gross margin and healthy store addition rate were the key positives in the result. DMART is on track to achieve its FY20E aggressive guidance on store addition with no signs of slowdown. We expect DMART to add 27 stores in FY20E. Miss in EBITDA and PAT estimates is more of accounting-miss than structural. We continue to maintain our thesis on DMART as a secular play on value migration in India. Huge scope of penetration and superior business model should help DMART to win market share....

The recent cut in corporate tax rate is a big positive for D-Mart as it was hitherto a full tax paying company. Incorporating the same, we revise our earnings estimates upwards by ~15%, thereby having a direct positive impact on cashflow generation. Despite a heavy capex nature of the business, D-Mart has a capital efficient business model generating superior RoCE of 23% and fixed asset turnover ratio of 4.1x. Optimal product assortment and stringent inventory management has led to robust inventory turns to the tune of 12.0x. D-Mart continues to trade on expensive...

although sales and PAT missed our and street estimates. D'Mart growth strategy remains on track led by 1) steady pace of store openings with 13 stores added in 1H (added 21 stores in FY19 and average of 22 stores in past 4 years) 2) scaling up of D'Mart ready model from 58 locations in FY19 3) ramp up in young clusters like Punjab, Tamil Nadu, Rajasthan, NCR and MP and 4)...

It has kicked off FY20 on an optimistic note by registering sturdy double-digit growth in its operating metrics led by store addition and improvement in gross margin. The profit grew 31.87 % to ` 323.06 crore and the revenue soared 27% to ` 5814.6 crore. EBITDA surged 39.17 % Y-o-Y to `607.71 crore with margin came in at 10.45 %, owing to better operational efficiency despite growing concerns over pricing pressure and competitive intensity. The Net Profit Margin is at 5.56%, higher than 5.35 % a year ago and ahead of...