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MOSL : AVENUE SUPERMARTS: Store additions healthy but demand environment subdued

Avenue Supermarts: Store additions healthy but demand environment subdued

(DMART IN, Mkt Cap USD33.8b, CMP INR4303, TP INR4100, 5% Downside, Neutral)

• Avenue Supermarts (DMART) posted an EBITDA/Adj. PAT growth of 33%/ 30% YoY (11%/14% miss), respectively, in 2QFY23. Revenue per store was up 9% YoY/10% v/s pre-Covid, but revenue/sqft was still 10% below pre-Covid level of 2QFY20 due to higher store size and inflationary pressure seen in non-food category. However, store additions remained strong and DMART added eight stores during the quarter.
• Lower footfalls, weak demand in the non-food (discretionary) category and higher store size impacted store productivity adversely in 2QFY23, but revenue per store recovered to 10% above pre-Covid level. We factor in our FY22-24E EBITDA/PAT CAGR of 45%/51%, with a 19% footfall CAGR. We value the company at 50x EV/EBITDA on FY24E basis and maintain our Neutral rating, with a TP of INR4,100 , given its rich valuation.

Consolidated EBITDA/Adj. PAT up 33%/30% YoY (11%/14% miss)

• DMART's consolidated revenue grew 36.6% YoY to INR106.4b (6% below our pre-quarter estimates; 78% above pre-Covid level of 2QFY20). Standalone revenue rose 36% YoY to INR103.8b (75% above pre-Covid level). Strong store additions propelled this growth.
• Revenue per store was up 9% YoY/10% v/s pre-Covid, but revenue/sqft was still 10% below pre-Covid level at INR33,727 in 2QFY23. This was attributed to: a) large store size that reduced revenue/sqft and b) the adverse impact of inflation on discretionary category (general merchandise and apparel).
• The company continued with its store addition momentum and added eight stores in 2QFY23 and 18 stores in 1HFY23.
• Consolidated gross margin expanded 20bp YoY and stood at 15.1% (40bp below estimate) that may be attributed to lower share of non-food category.
• Consolidated EBITDA stood at INR8.9b, up 33% YoY (11% miss). However, EBITDA margin stood at 8.4%, 20bp lower than 2QFY22 and 2QFY20 (50bp below estimate) possibly due to aggressive store adds and soft LTL growth.
• Consolidated PAT stood at INR6.9b for 2QFY23, up 64% YoY (9% beat) on lower tax (included one-time tax adjustment of INR1.41b for the prior year). Adjusted for this tax benefit, PAT grew 30.4% YoY to INR5.4b (13.5% miss).
• DMART continued to stay debt free with INR11.5b net cash. Inventory days (at 32) have reached closer to normalized level. Operating cash flow for 1HFY23 jumped to INR8.3b from INR2.4b in 1HFY22. Consolidated FCF for 1HFY23 stood negative at INR1.3b because of accelerated net capex of INR9.6b.

Key highlights from the management commentary

• Inflationary stress remains acute in the lower price points in discretionary non-FMCG categories as the company continues to see lower footfalls. While the average basket size has improved, footfalls continue to remain below the pre-Covid levels.