DMart: Finally, hits the growth Phase says HDFC Securities

DMart finally hits the growth phase (after a disappointing first half of FY21). The grocer clocked a healthy 10% topline growth (estimate of 8.5%). While gross margin delivery was strong (15.1% vs Expectations of 14.8%), its underpinnings remain weak (on the back of lower discounting in staples). Non-essential sales remain weak. EBITDAM expanded 52/256bp YoY/QoQ to 9.3% courtesy strong cost control. (estimate of 9%). While HDFC Securities increase their FY22/23 EPS estimates by 5-6% resp. to account for marginally higher revenue/sq. ft, HDFC Securities downgrade DMart to Sell (Earlier Reduce) as the recent run-up leaves no room for an investment case (DCF-based TP: 2,160/sh – implying 34x FY23 EV/EBITDA + 2x FY23 sales for e-comm business).

DMart Q3 FY21 highlights:

DMart Revenue grew 10.1% to Rs. 74.3bn (Estimate of Rs 73.3 bn) as footfalls continued to recover from the wrath of COVID-19. While GM expanded to 11/189bp YoY/QoQ to 15.1% (Estimate of 14.8%), its underpinnings remain weak. We suspect lower discounting levels in staples (200-400bp lower) continue to cushion the adverse margin impact of lower non-essential sales. Management, too, highlighted that recovery in OOH (out of home) categories remains weak. EBITDAM expanded 52/256bp YoY/QoQ to 9.3%, courtesy strong cost control (estimate of 9%). DMART added 1 store in 3Q (now: 221 stores). >/=2-year-old stores (162) have hit 96% of Dec-19 sales. Non-FMCG supplies remain inconsistent and RM prices are also inching up; hence, inferior sales mix and margin pressure can’t be ruled out in the near term

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Dmart Outlook:

While DMart remains best-placed within the peer set to carve out a recovery, it’s still not out of the woods. An extended slump in nonessential sales could mean that discounting in staples will be lower, thereby opening up the space for competition. This, coupled with punchy valuations (FY23 P/E: 75x+), leaves no margin of safety/error for the investor and the business.