Avenue Supermarts: Ecommerce to refuel growth engine; BUY with target of Rs 3296 says Prabhudas Lilladher

Prabhudas Lilladher retained Buy rating and increased their target price to Rs 3296 (Rs2316 earlier) despite 52% appreciation since our upgrade in October. Prabhudas Lilladher estimated 29.8% PAT CAGR over FY20-23 and 28.9% over FY20-25, as they increased EPS between 4.9-5.7% over FY21 to 23 and 2.9% for FY21/22/23.

As post covid recovery catches up, D’Mart seems gaining confidence on expansion of D’Mart ready with:

1) launch in Ahmedabad, Bangalore and Hyderabad
2) allocation of store space for operations
3) extending D’Mart ready to general merchandise (Home furnishings, small electrical and Kitchen aids) and fruits and veggies

Q3 FY21 results were strongly driven by a surge in festival shopping resulting in a beat across EBITDA/PAT. Worst seems over although near term outlook remains mixed due to disruption due to night curfew and weekend closure in certain cities, supply issues in non FMCG goods and mix impact as apparel, laundry, footwear and travel segments remain impacted.

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Sales and PAT increase 10.1% and 19.3%:

Net Sales increased 10.1% YoY to Rs 74.32bn (Estimate Rs 72.91 bn). Gross margins remained flat YoY at 15.1% (Estimate of 14.5%). EBITDA increased 16.6% YoY to Rs 6.91 bn (Estimate Rs 5.91 bn). EBITDA Margins expanded 50 bps to 9.3% (Est 8.1%) led by lower other expenses (50 bps). Adjusted PAT increased 19.3% YoY to Rs 4.70bn (Est Rs 3.98 bn).

However, the long term story is getting better with:

1) Increasing focus on Ecom which can provide further scale to already existing supply chain
2) Everyday value focus
3) Expectations of D’Mart doubling stores over FY20-25.

Periodic disruptions continue:

Surge in festival shopping delivered a better quarter; however December month was impacted as operations continued to remain restricted in some cities due to night curfews and weekend closure. Apparel, laundry, footwear, travel and some OOH (Out of Home) usage categories are recovering slowly. Sales from >2 year older stores (162 stores) during Dec20’ stood at 96% of sales in Dec19’. Supplies from the non FMCG sector remain inconsistent as higher raw material prices have impacted availability in certain categories which can impact sales mix and margins in the near term.

Rising E- Commerce Focus is a positive:

Q3 Imputed sales stood at Rs 1093 mn as against Rs 570 mn in Q3 FY21 and Rs 879 mn in Q2 FY21 as Covid led to faster than expected change in consumer behaviour for ordering online.

D’Mart Ready is gaining confidence on E-commerce as:

1) It has soft launched D’Mart Ready in select pin codes of Ahmedabad, Bangalore and Hyderabad
2) It has Leased some space at its brick and mortar stores for D’Mart Ready operations in these citie