Avenue Supermarts: Difficult time ahead

25 Jul 2023 , 11:23 AM

Recommendation: Reduce; Target price: Rs 3500

 

DMart’s sales growth accelerated to 38% YoY (3 year Cagr 19%) from 28% in FY22 driven by increase in both revenue per store growth to 15% (from 12%) and avg. store growth to 20% (from 14%). Store opening however reduced to 40 from 50 in FY22. Ebitda margin saw modest expansion of 51bps YoY owing to gross margin expansion and decline in employee costs per store. FCF turned positive for the first time in history on higher CFO and lower capex. ROIC expanded to 18% from 13.8% in FY22. GM&A share of revenue declined marginally YoY and remained below pre-Covid. Maintain REDUCE, TP Rs.3500.

Revenue per store accelerates/store addition slows: 

DMart’s FY23 revenue growth accelerated to 38% YoY from 28% in FY22 driven by pick up in revenue per store growing by 15% YoY (12% in FY22) on a Covid base for Q1. New store openings however slowed to 40 compared to 50 last year. Non-foods revenue per store saw the highest acceleration in YoY growth to 22% YoY from 12% in FY22, while general merchandise & apparel (GM&A) revenue per store growth fell marginally to 13.2% from 14.2% in FY22. GM&A share to revenue as a result stood at 23%, lower than pre-Covid level of ~28% and marginally lower than 23.4% in FY22.

Modest expansion in Ebitda margin: 

Ebitda per store in FY23 increased by 22% YoY (3 year Cagr 3%) resulting in modest Ebitdamargin expansion of 51bps YoY to 8.7%. This was driven by gross margin expansion of 30bps YoY and 1% YoY decline in employee costs per store. Other expenses per store however increased by 17% YoY (after declining for two years) and is now back to pre-Covid level. Within this, contract labour expenses increased by 12% on per store basis and other utility expenses per store increased by ~25%.

FCF turns positive first time in history: 

FCF in FY23 stood at Rs.5.5bn compared to negative values in history from FY12. This was driven by higher cash flow from operations and lower capex on account of lower store openings. Capex per new store increased by 31% YoY on account of larger stores being opened / real estate inflation. DMart Ready reported sales growth of 32% YoY but Ebitda margin pre-IndAS deteriorated to minus 7.5% from minus 6.1% in FY22.