MOSL: AVENUE SUPERMARTS (Neutral)-Results in-line-geographical expansion to drive growth

​Avenue Supermarts: Results in-line; geographical expansion to drive growth

(DMART IN, Mkt Cap USD8.8b, CMP INR919, TP INR882, 4% Downside, Neutral)

• In-line revenue, EBITDA and PAT: DMART reported overall revenue of INR35.9b (est. of INR35.6b) in 1QFY18, as against INR26.5b in 1QFY17, marking growth of 35.7%. EBITDA margin contracted 50bp from 8.9% in 1QFY17 to 8.4% (est. 8.4%) in 1QFY18 on account of minor migration challenges into the GST regime and higher employee expenses (increase in manpower for new stores added in 4QFY17). EBITDA stood at INR3b (est. of INR3b), as against INR2.3b in 1QFY17 (up 29%). Accordingly, adj. PAT grew 47.6% from INR1,184m in 1QFY17 to INR1,748m (est. INR1,775m) in 1QFY18. The sharp increase in PAT was led by higher other income (up from INR49m in 1QFY17 to INR228m in 1QFY18).
• Minor impact of GST during transition: DMART witnessed margin contraction of 50bp YoY to 8.4% in 1QFY18 on account of the transitional impact of GST. However, migration challenges into the GST regime have been minimal for the company, with only supplies from certain vendors expected to see short-term disruptions. On the consumer front, the company did not witness any impact on sales/footfall during the transition and neither any impact is expected post GST, indicating that the consumption levels have not changed.
• Store addition to pick up in 2HFY18: DMART added only one store (in Punjab) in 1QFY18, keeping growth of total trading area muted at 4.1m sq.ft. However, going by the trend, the company adds majority of its stores in the second half of the year (2HFY17 witnessed addition of 19 stores; 90.5% of the annual store addition). The company is expected to expand its footprint in geographies where it has limited presence, and further add ~24 stores in FY18, in line with its business strategy.