DMart – Strong Q3FY20 Numbers But are Valuations Cheap?


D’Mart retail chain operator Avenue Supermart has posted steady performance during the fiscal third quarter to December led by adding few stores and taking advantage of corporate tax relief extended by the government.

Avenue Supermart reported a 53% on-year rise in standalone profit at Rs 394 crore compared with Rs 257 crore posted for the same quarter last year.

Revenue for the quarter rose 24% to Rs 6,752 crore compared with Rs 5,451 crore reported for the year-ago period.

EBITDA rose to Rs 593 crore from Rs 453 crore year on year. The EBITDA margin for the quarter came in at 8.8%, a rise of 50 basis points over 8.3% in December quarter of 2018.
With all other cost items being steady (as a % of sales), EBITDA margin expansion continues to be led by the gross margin expansion, which is a result of the change in product mix and pricing renegotiation with vendors.

PAT margin for the quarter improved to 5.6% from 4.5% in the year-ago quarter. PAT margin improvement partly reflects the benefit due to a revision in corporate tax rates.

Meanwhile, a closer look at the consolidated and standalone revenue numbers shows momentum in the online DMart Ready format and private labels remaining strong – 144% on year/36% on quarter revenue growth with EBITDA margin expansion of 130bps on a quarter.

The addition of seven stores took the 9MFY20 total addition to 20, putting the company on course to meet its full-year guidance of 30 stores.
Avenue Supermart opened 20 stores during the first nine months of this financial year.

DMart is a play on India’s organized retail story, and it is likely to deliver a steady performance in the current fiscal year. Increased competition in the retail space is likely to make incremental margin expansion a challenge.

While we believe that financials reported are good and the pace of store additions has picked up the expensive valuation leave limited scope for near-term outperformance.

Despite a heavy Capex nature of the business, D-Mart has a capital-efficient business model generating superior RoCE of 23% and a fixed asset turnover ratio of 4.1x.

Optimal product assortment and stringent inventory management has led to robust inventory turns to the tune of 12x

However, valuations at 66.2x FY21 EPS and 51.5x FY22 EPS factors in the expected growth.

On a longer-term basis we continue to maintain our thesis on DMART as a secular play on value migration in India.

The huge scope of penetration and superior business model should help DMART to win market share.

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