MOSL: AVENUE SUPERMARTS (Sell)-Margin pressures evident-Rich valuations restricting re-rating

Avenue Supermarts: Margin pressures evident; Rich valuations restricting re-rating

(DMART IN, Mkt Cap USD13.9b, CMP INR1569, TP INR1400, 11% Downside, Sell)

• Revenue growth robust, but no relief on margins: Revenue grew robustly by 33% YoY to INR54.5b (in-line) in 3QFY19. However, the company continued facing margin pressure (gross margin down 170bp YoY to 14.7% off a high base), mainly due to its focus on price competitiveness. Consequently, EBITDA increased by a modest 7.5% YoY to INR4.5b (5% miss), with the margin contracting 200bp YoY to 8.3%. PAT, too, grew by a marginal 2.1% YoY (8% miss) to INR2.6b due to lower other income (-37% YoY) and higher depreciation/finance cost (+33%/36% YoY).
• Four new stores added in 3QFY19: DMART added nine new stores in 9MFY19, (four in 3QFY19), taking its store count to 164. The store addition trend appears similar to last year – 10 new stores added in 9MFY18. We, however, note that DMART tends to accelerate store addition toward the fiscal-end (14 new stores added in 4QFY18). In 4QFY19, too, it is likely to add 13-14 new stores.