Our DMart share upgrade is not only due to the stock having corrected 45% from its highest. A broad market correction (and possibly some technical factors) brings rationality to BAAP (Buy-At-Any-Price) stories. In FY22-24E, we believe that it has value and volume tailwinds: (i) inflation (higher absolute gross profit per unit, operating leverage) and (ii) probably higher number of visitors as more consumers prioritize value. Furthermore, we believe that it will appear to accelerate the store expansion, and the benefit of the latest expansion has not yet been fully invested – the revenue intensity is lower than the level before Covid. At 61x FY24E P / E, we find valuations tasty. Upgrade to Buy; TP Rs 3,900.
Q4FY22 – revenue growth led by better mobility: Revenue / Ebitda / PAT grew 18% / 20% / 7% year / year, respectively. On a 3-year CAGR basis, revenue growth and Ebitda were 20% and 25%, respectively. There is some slowdown in growth rates despite almost normal operating restrictions due to the impact of Covid in January’22; management, however, highlighted that Mar’22 had a robust recovery with a decent like-for-like growth relative to Mar’21. We note that most resellers have highlighted lower number of visitors (compared to levels before Covid), but higher conversions (or bill size in the case of DMart). Management has also highlighted that (i) the demand for ordinary goods and clothing has still not recovered, and (ii) inflation makes it possible to deliver relatively better value to customers and control costs better.
DMart Ready continued to scale up well with a doubling of revenue compared to last year, and activities expanded to 7 new cities (a total of 12 cities).
Store expansion: DMart added 21 stores during the quarter (FY22: 50), bringing its total number of stores to 284 (11.5 mn sq. Ft.). DMart seems to be adding stores of larger sizes – according to our calculations, the average size of new stores is ~ 57,100 sq. Ft. ft. against a total average of ~ 40,500 sq. m. ft.
Weak gross margin print: Gross margin decreased ~ 10bps year-on-year to 14.3%. As highlighted above, a weak mix continued to affect the gross margin print. Second, DMart intends to drive efficiency gains in procurement and also sharpen the range (in the midst of current inflationary times). Nevertheless, the Ebitda margin increased by ~ 20bps year-on-year to 8.6%, primarily driven by operational leverage benefits.
Valuation and risks: We largely maintain our earnings estimates for FY23E / FY24E; we model revenue / Ebitda / PAT CAGR of 35% / 42% / 45% over FY22-24E. Upgrade to Buy (from sale) with a DCF-based unchanged target price of 3,900 Rs.
