Avenue Supermarts (DMART) reported a y-o-y revenue growth of 18% in Q1FY24, with a 4% increase in revenue per square foot. However, their gross margin (GM) contracted by 120 bps compared to the previous year due to weak discretionary demand. This contraction in GM also resulted in a 130bp decline in Ebitda margin (EBITDAM). As a result, both Ebitda and profit after tax (PAT) grew by only 3% y-o-y, missing the expectations of a 13% and 12% growth, respectively. On a positive note, the adverse impact caused by larger-sized stores seems to be stabilising, as both revenue per square foot and revenue per store increased by 4% and 5% y-o-y, respectively. Additionally, the rising cost of retailing has had a limited impact, as the 13% increase in store size from FY20 to FY23 is now factored into the base.
Robust store additions (72% footprint additions over FY20-23), healthy cost efficiencies and recovery in discretionary demand could drive growth. We have largely maintained our estimates and factored in a revenue/PAT CAGR of 26%/ 27% over FY23-25. Subsequently, we assign a 43x EV/Ebitda multiple on an FY25E basis to arrive at our target price of Rs 4,420. Reiterate Buy.
Consolidated GM contracted 120bp y-o-y and stood at 15.2% (120bp miss), which was primarily due to lower sales contribution from GM & A. Subsequently, this led to only 10% y-o-y rise in gross profit to `18 billion (7% miss) in Q1FY24. Other expenses/ Employee costs grew 24%/15% y-o-y to Rs 5.6 billion/Rs 2.06 billion in Q1FY24. On per sqft basis, Other expenses/Employee costs rose 9%/3% y-o-y.
Compression in GM led to a contraction in Ebitda margin to 8.7%. This led to only 3% y-o-y improvement in consolidated Ebitda to Rs 10.4 billion. Consolidated PAT also grew 3% y-o-y to Rs 6.6 billion. PAT margin contracted 80bp y-o-y to 5.6% in Q1FY24. D-Mart added 3 stores taking the total count to 327.
Valuation and view
D-Mart clocked 19% revenue CAGR over FY20-23 led by 20% footprint additions. Subdued same store sales growth (SSSG) was mainly due to: (i) the additions of bigger stores over the last couple of years and (ii) weak discretionary demand (share of discretionary items reduced to 23% in FY23 from 27% in FY20). However, despite its weak SSSG, D-Mart has managed to protect its Ebitda margin at pre-Covid levels, through its strong cost-control measures unlike most other retailers.
We believe SSSG is set to recover in FY24, due to: (i) easing general inflation along with raw material (RM) cost reduction that may help in reviving discretionary demand; and (ii) the company’s strategy to open larger stores as the smaller ones are likely to report a growth plateau after almost three years. Those larger stores are now in the base and will start contributing to store productivity, with further room to grow their footfalls.
We have largely maintained our estimates, factoring in a revenue/ PAT CAGR of 26%/27% over FY23-25 aided by 16%/9% growth in footprints/revenue productivity. We value the company at 43x EV/Ebitda on an FY25E basis to arrive at our TP of Rs 4,420.