ICICI Direct recommended hold rating on Avenue Supermarts with a target price of Rs 2360 in its research report dated July 13, 2020.
ICICI Direct's research report on Avenue Supermarts
As anticipated, Q1FY21 was a challenging quarter for D-Mart with store closures (more than 50% in April) and restrictions on sale of GM & apparel impacting quarterly numbers. The management in its previous commentary had highlighted significant fall in revenue in April (down ~45% YoY) owing to stringent lockdown measures. Post relaxations in certain states, a gradual recovery was visible (implied de-growth of ~27% YoY in May-June). Revenue for the quarter de-grew 33% YoY (vs. estimate of 31% de-growth) to Rs 3883.2 crore. The company added two stores in the quarter taking total store count to 216. The average size of the store opened in the quarter (~1 lakh sq ft) was more than 2x higher than the historical average store sizes (~45000-50000 sq ft). An unfavourable product mix led gross margins to decline 220 bps YoY to 14.2%. Furthermore, higher opex led EBITDA margins to decline sharply by 740 bps YoY to 2.9% in Q1FY21. Higher other income and decline in finance cost (owing to recent capital infusion) aided PAT, to a certain extent. Ensuing PAT de-grew 87.6% YoY to Rs 40.1 crore. High store concentration in the worst hit Covid-19 states (Maharashtra, Gujarat comprise ~53% of total stores), may hamper store operations due to stringent measures by local authorities. Currently, stores are operating at 80% of pre-Covid levels with discretionary spends under pressure.
We build in revenue and earnings CAGR of 21% and 29%, respectively, in FY20-22E, assuming a strong recovery from H2FY21E onwards. We reiterate our HOLD rating with a target price of Rs 2360 (45x FY22E EV/EBITDA).
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