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MOSL: AVENUE SUPERMARTS (Sell)-Deceleration in earnings growth to put pressure on valuation

Avenue Supermarts: Deceleration in earnings growth to put pressure on valuation

(DMART IN, Mkt Cap USD11.2b, CMP INR1254, TP INR1125, 10% Downside, Sell)

 

• Cost pressure continues to restrict earnings growth: Standalone revenue surged 32% YoY to INR50.3b (in-line) on robust store additions (12 stores v/s +14 stores in 4QFY18/est.) coupled with strong SSSG. Despite strong revenue growth, pressure on gross margin (GM) continued. GM contracted 50bp YoY to 14.4% (-30bp QoQ), potentially due to the company’s recent focus on price competitiveness. EBITDA margins contracted 25bp YoY as the drop in GM was partly offset by operating leverage benefits. PAT grew 20% YoY (9% miss) to INR2b, as EBITDA growth was partly offset by 33% YoY increase in depreciation cost. For FY19, consol. revenue/EBITDA/PAT grew 33%/21%/12% YoY with 21 store additions, taking the total store count to 176.
• Risk of decelerating earnings growth: DMART's pace of footprint addition in FY19 slowed to 14% v/s the high-teens growth seen in the last 2-3 years. FY19 SSSG, however, expanded 360bp to 17.8% (v/s 14.2% in FY18; est. of 20%). Capex/sqft has also consistently inched up from ~INR7000-8000/sqft from 3-4 years ago to over INR12,000/sqft. These factors may restrict the pace of revenue growth, as well as put pressure on FCF and the return profile. Further, margins may remain under check given the hyper competitive market scenario. Thus, we cut EBITDA margin for FY20/21 by ~40bp and PAT estimate by 4-5%.