PL Stock Report: Avenue Supermarts (DMART IN) - Q2FY24 Result Update – Operating parameters bottomed out - BUY

Avenue Supermarts (DMART IN) - Amnish Aggarwal - Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: BUY | CMP: Rs3,920 | TP: Rs4,724

Q2FY24 Result Update – Operating parameters bottomed out

Quick Pointers:

♦ General merchandise & Apparel sales stabilizing at 23-24% band.

♦ LTL sales growth of 8.6%, sales/ft growth of 6% and sales / store growth of 6.5% indicates best numbers in past few quarters

♦ CWIP increase of Rs3.9bn in 1H24, store addition to accelerate in 2H24

D’Mart 2Q results were in line on EBITDA and PBT (13.9% growth YoY) although higher tax rate (26.8%) and tax write back (Rs1.4bn) in base quarter impacted PAT. D’Mart reported improved operating parameters despite delay in festival season. LTL sales growth of 8.6% shows strong trend while sales/sq ft. growth of 6% and sales/store growth of 6.5% are best in past many quarters (ex of covid base quarters). Bills/store/day declined QoQ while average bill value increased 12.7% QoQ, more so in line with seasonality.

We believe that the loss of sales in Apparel is structural as value formats like Zudio and Reliance Trends have reduced the consumer appeal of Hypermarts. We note that CWIP increase of Rs3.9bn in 1H24 and 12 store additions makes us confident that D’Mart will be add 45 stores in FY24. We believe worst seems nearly over and Food and Grocery segment is expected to drive rebound in sales and profit growth in coming quarters. We estimate 10% EPS growth in FY24 but 27.3% CAGR over FY24-26. D’Mart has a huge runway to grow with 1500+ store potential in duopoly market and scale up in D’Mart Ready. We remain positive and increase DCF based target price to Rs4724 (Rs4576 earlier) as we roll forward to Sept25. Retain BUY

Consol Revenues grew 18.7% YoY to Rs126.2bn. Gross margins contracted by 45bps YoY to 14.7% (PLe:14.5%) due to lesser contribution from General merchandise and apparel. EBITDA grew by 12.7% YoY to Rs10bn (PLe: Rs10.1bn). Margins contracted by 42bps YoY to 8%. (PLe:8.0%). Cost of Retail contracted by 3bps YoY to 6.7%. PBT grew by 13.9% to Rs8.52bn (Ple 8.55bn). Adj PAT declined by 9.1% YoY to Rs6.2bn (PLe: Rs6.4bn) due to higher tax rate of 26.8% and Rs1.4bn tax write back in base quarter.

Operating parameters bottomed out: Bills cuts grew from 108mn to 147mn YoY while LTL sales grew by 8.6%. sales/ft increased by 6.0% to Rs8984, best number in past 8 quarters, excluding 1Q23 due to covid base. Avg. sales/store increased by 6.5% as against an average of 4.5% in past 3 quarters. Inventory turns improved from 6.7 to 7. Cash flows from operations remains steady at Rs16.46bn v/s 16.75bn 1H23. CWIP increased by Rs3.9bn versus March23 (Rs680mn decline in 1H23 on 18 store openings) indicating significant pick up in store openings in 2H24.

Discretionary segments remain under stress: General merchandise and apparel remains under pressure in 2Q24. Although General merchandise is fast catching up towards pre covid levels, apparel loss seems structural in our view. We note that General merchandise and apparel share is 23.2% of sales as of 2QFY24, down 154bps YoY and 180bps lower than 1HFY23 level of 24.8%.

Adds 9 stores in 2Q, store size higher both YoY and QoQ: D’Mart added 9 stores in 2QFY24 vs 3/8 stores in 1QFY24/2QFY23 taking the total store count to 336 with retail business area of 13.9mn sq. ft. the average area per new store opened is 44.4k versus 33.3k sq ft in 1Q24 and 37.5k in 2Q23. 9 out of 12 Stores added in 1H24 were majorly done in mature clusters of Gujarat and Maharashtra.

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