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MOSL: AVENUE SUPERMARTS: To focus on growth, expand the e-commerce business

AVENUE SUPERMARTS: To focus on growth, expand the e-commerce business

(DMART IN, Mkt Cap USD34.5b, CMP INR4237, TP INR3740, 12% Downside, Neutral)

Is the sluggish recovery or higher store sizes hurting sales productivity and gross margin?

Revenue/sq. ft. has been sluggish (-8% CAGR) over the last three years. The management sees little cause for concern as the Mass Discretionary segment (27% of revenue) is yet to fully recover. It appeared optimistic that high bill values have partly compensated for the lower footfalls and cut in bill sizes. The higher store size has pulled down revenue productivity, but it gives DMART an opportunity to increase product offerings to the mass value customer, thus increasing its wallet share. It also offers a longer term growth visibility. Being on an ownership model, the lower revenue/sq. ft. in the initial period is less concerning as the benefits of long-term high ROIC far outpace the lower throughput.

 

In no hurry to scale up its online presence

Despite the mushrooming of several Online Grocery players, with some achieving sizeable scale, the management appears in no hurry to scale up its online presence. The Online segment attracts both value and convenience-oriented customers. DMART continues to focus on the value customer, through its pricing and product offering. Even though it is yet to turn profitable, the management is now much more constructive on the business, with plans to: a) build new fulfillment centers in close proximity to debottleneck capacity, b) emphasize on home delivery wherever viable, and c) drive scale to improve economics in the Online Grocery business. It also plans to leverage its offline store locations and sourcing strength to drive unit economics. However, it is yet to see clarity on profitability. The management doesn’t believe this has impacted its offline store business.

 

Building internal capabilities to drive store additions, but wary of changing market conditions

The last few quarters have seen strong store additions, ahead of our estimate, despite the COVID-led disruptions. The last five years too saw an increase in the number of store additions to maintain the pace of growth. The management acknowledged that with scale this can be a challenge, given the changing Real Estate market dynamics, even it has built internal capabilities. It targets higher store additions going forward. We have factored in cumulative store additions of 135 stores over FY22-24E, at a footprint CAGR of 18%.