Our DMart stock upgrade is not just because the stock has corrected 45% from its high. A broad-based market correction (and possibly some technical factors) does bring rationality to BAAP (Buy-At-Any-Price) stories. In FY22-24E, we believe it has value and volume tailwinds: (i) inflation (higher absolute gross profit per unit, operating leverage) and (ii) likely higher footfalls as more number of consumers prioritise value. Furthermore, we believe it will look to accelerate store expansion and the benefit of recent expansion is yet to fully kick in – revenue intensity is lower than pre-Covid levels. At 61x FY24E P/E, we find valuations palatable. Upgrade to Buy; TP Rs 3,900.
Q4FY22 – revenue growth led by better mobility: Revenue/Ebitda/PAT grew 18%/20%/7% y-o-y, respectively. On a 3-year CAGR basis, revenue and Ebitda growth was 20% and 25%, respectively. There is some softening of growth rates despite near-normal operating restrictions due to impact of Covid in Jan’22; however, management highlighted that Mar’22 had a robust recovery with decent like-for-like growth over Mar’21. We note most retailers have highlighted lower footfalls (vs pre-Covid levels) but higher conversions (or bill size in case of DMart). The management has also highlighted that (i) demand for general merchandise and apparel business has still not recovered and (ii) inflation is allowing to deliver relatively better value to shoppers and manage costs better.
DMart Ready continued to scale-up well with revenue doubling over last year and operations expanding to 7 new cities (total 12 cities).
Store addition: DMart added 21 stores in the quarter (FY22: 50), taking its total store count to 284 (11.5 mn sq. ft.). DMart seems to be adding stores of larger sizes – as per our math, the average size of new stores is ~57,100 sq. ft. versus overall average of ~40,500 sq. ft.
Weak gross margin print: Gross margin was down ~10bps y-o-y to 14.3%. As highlighted above, a weak mix continued to impact the gross margin print. Secondly, DMart intends to drive efficiency gains in procurement and also make assortment sharper (amidst the current inflationary times). Nevertheless, Ebitda margin expanded ~20bps y-o-y to 8.6% primarily driven by operating leverage benefit.
Valuation and risks: We largely retain our earnings estimates for FY23E/FY24E; we model revenue/Ebitda/PAT CAGR of 35%/42%/45% over FY22-24E. Upgrade to Buy (from Sell) with a DCF-based unchanged target price of Rs 3,900.