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MOSL: AVENUE SUPERMARTS (Sell)-Growth prospects strong, but margin headwinds blowing fiercely

Avenue Supermarts: Growth prospects strong, but margin headwinds blowing fiercely 

(DMART IN, Mkt Cap USD11.8b, CMP INR1310, TP INR1115, 15% Downside, Sell)

 

DMart hosted its annual analyst meet. Key takeaways:

• Management indicated that it is looking at accelerating store addition (v/s 21 in FY19) and that it is open to further explore the lease model to reduce the capex intensity (capex/sq.ft. up 2.5x over FY16-19). We expect 24 store adds and 26% revenue CAGR over FY19-21.
• The company acknowledged that its price value arbitrage versus peers has reduced due to intensifying competition. However, it would put in all efforts to keep a check on input costs, such that it translates into low prices. This is DMart’s biggest advantage, in our view.
• Intensifying price competition, higher capex toward new stores and upcoming lease cost will continue exerting pressure on the profit margin. We expect flattish EBITDA/PAT margin in FY20/21, with 28% PAT CAGR.
• Globally, offline retailer costs are lower than online, indicating limited threat on that front. However, cognizant of the online threat, the company has entered the e-commerce space with its DMart Ready stores (although this format is still in the infancy stage). Also, the ‘cash and carry’ business is in the planning stage.
• The stock is richly valued at EV/EBITDA and P/E of 31x and 56x, respectively, on FY21E, factoring in 28% PAT CAGR over FY19-21 (still much below 55% during its heydays over FY15-18, which is not fully captured in its valuations). We, thus, maintain our Sell rating on the stock with a target price of INR1,115.