Analyst corner: Maintain ‘sell’ on D-Mart operator with TP of Rs 1,900

In FY20, D-Mart added 38 stores vs 21 in FY19. In FY21, we expect lower store adds, while in FY22, this should once again gather pace with 45 store adds.

A 10.9% SSSG and a strong 18 store additions drove a 24% y-o-y revenue growth (inline) in FY20. However, the company reported a big 22% miss on Ebitda with a 4% y-o-y growth. We have cut our Ebitda estimate by 16.8% for FY21E due to 50% of stores being closed over April-May 2020, lower gross margins from increased nondiscretionary revenue, and higher opex. However, we maintained our FY22E Ebitda -estimates given the sharp recovery expectation as it pertains to nondiscretionary.

D-Mart’s consolidated revenue grew 24% y-o-y to Rs 6,300 crore (down 8% q-o-q, 4% above estimate) on account of sales of only essential products at DMART stores. In March, revenues grew only 11% y-o-y (vs March 2019) due to lockdown in the nine days of Match 2020. Hence, implied revenue growth over January-February is ~30%. For FY20, revenue/Ebitda grew 24%/8.1% to Rs 24,900 crore/Rs 2,020 crore with a flat Ebitda margin at 8.1%. Also, PBT increased by 24% to Rs 1,770 crore while PAT clocked growth of 46% to Rs 1,320 crore on the back of lower taxes. Gross margins dropped ~110bps y-o-y to
13.6% due to the closure of the Apparel and General Merchandise category sales. Other expenses were higher at 21% y-o-y to Rs 340 crore on account of a large number of store adds (vs expectation) and increased cost of sanitisation and preventive measures. Furthermore, employee cost was up 37% y-o-y (6.5% q-o-q) to Rs 130 crore (in-line). Subsequently, Ebitda on a pre-Ind-AS 116 basis grew 4% y-o-y to Rs 390 crore (22% below estimate), with margin contraction of 120 bps to 6.2%. PBT grew 12% y-o-y to Rs 340 crore (20% miss), primarily on account of higher other income (3.5x growth to Rs 34.9 crore), which increased due to QIP of Rs 4,000 crore. Due to this and lower tax, PAT grew 48% y-o-y to Rs 280 crore (a 17% miss).

D-Mart added 18 stores in Q4FY20, taking the total store count to 214 stores. In FY20, D-Mart added 38 stores vs 21 in FY19. In FY21, we expect lower store adds, while in FY22, this should once again gather pace with 45 store adds. While Q1 could be a washout, D-Mart could see recovery sooner than other retailers as nondiscretionary revenue contributes 72% to the total revenue. We cut our FY21 Ebitda by 17%, but retain our estimates for FY22. We raise our target multiple on EV/Ebitda to 40x from 35x
and arrive at a TP of Rs 1,900 from the current price, which still implies a 21% downside; we maintain ‘sell’.