Avenue Supermarts Rating- Hold; Downgrade from add

Avenue Supermarts Rating: Hold; Downgrade from add

Expect revenue, EBITDA, PAT CAGR of 34%, 42%, 45% in FY22-24

Avenue Supermarts’ (DMart) Q2 revenue performance was decent with ramp up of new stores. However, it was slightly underwhelming given (1) sales per sq. ft. was still below pre-Covid levels, (2) discretionary (non-FMCG) demand has still not fully recovered and (3) footfalls recovery has been dull. Gross margin print of 14.5% was also slightly below pre-Covid levels (and down 133bps QoQ) due to weak product mix. EBITDA margins came in at 8.6% despite the operating leverage benefit.

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Q2FY23 revenue performance continues to be robust: Revenue / EBITDA / recurring PAT grew 36% / 34% / 31% YoY, respectively. Even as the new stores opened in the last two years continue to ramp-up well, sales per sq. ft. for the quarter were still lower by ~9% as compared to Q2FY20. Management highlighted that FMCG and staples segment have performed better than general merchandise and apparel segments. Secondly, discretionary (in non-FMCG) has still not recovered to pre-Covid level given (1) lower footfalls and (2) stress in the lower price points in discretionary non-FMCG categories. We believe high inflation led pricing hides the stress on volume growth due to inflationary impact on consumers. LFL growth (for stores older than five years) was at a 3-year CAGR of 6.5%. It has opened new DMart stores close to the existing stores, at some locations, where the throughput is significantly higher than the company average.

DMart Ready continued to scale-up well with 82% YoY revenue growth while expanding its presence in six new cities (total 18 cities) with focus on larger cities. More than 90% of the revenue of DMart Ready still comes from five cities – Mumbai, Pune, Bangalore, Hyderabad and Ahmedabad.

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Store addition: DMart added eight stores in the quarter, taking its total store count to 302 (12.4mn sq. ft.). In the quarter it seems to have added stores of smaller sizes – as per our math, the average size of new stores is ~37,500 sq. ft. versus overall average of ~41,000 sq. ft.

EBITDA margin back to pre-Covid levels: Gross margin was down ~60bps vs 2QFY20 at 14.5% (2QFY22: 14.3%). As highlighted above, a relatively weak mix continued to impact the gross margin print. EBITDA margin was also weak at 8.6% similar to 2QFY20 (8.7%).

Valuation and risks: We cut our earnings estimates for FY23E / FY24E by 4%; we model revenue / EBITDA / PAT CAGR of 34% / 42% / 45% over FY22-24E. Downgrade to HOLD (from ADD) with a DCF-based unchanged target price of Rs 4,200. Key downside risks are slower turnaround of e-commerce operations and higher-than-expected competitive intensity. Key upside risk is significant improvement in footfalls.