ICICI Direct's research report on Avenue Supermarts
The Q4FY20 results were significantly impacted by the Covid-19 crisis resulting in lower sales and an unfavourable product mix in March. Revenue for the quarter grew 24% YoY to Rs 6255.9 crore. With closure of stores from mid-March onwards, sales in March grew 11% YoY. The situation worsened in April when more than 50% of stores were not operational while rest were restricted to limited hours. The same translated to revenue de-growth of ~ 45% YoY in April. With the company having a material presence in worst hit Covid-19 states (Maharashtra, Gujarat constitute ~53% of total stores), this weighed on its performance. Furthermore, restrictions on sales of general merchandise & apparel (27.3% of revenues) led gross margins to decline 110 bps YoY to 13.6% in Q4FY20. Post relaxation in certain states, green shoots were visible with the company reporting 17% MoM growth in the first half of May. Given the unprecedented scenario, the outlook for FY21E appears challenging. EBITDA is expected to remain under pressure owing to weak footfalls, unfavourable product mix and higher operating expenses (higher sanitation cost and employee cost). The recent infusion of funds into the business (Rs 4100 crore) have further strengthened the balance sheet.
Near term headwinds like lower store throughput, inferior product mix and increased operational cost could lead to a softer revenue and profitability performance in FY21. The company’s response to the crisis has been encouraging with execution of initiatives like DMart on Wheels model for large housing societies to counter lower footfall at its stores and expansion of DMart ready model to majority of its stores. DMart has proven to be a resilient business model generating superior RoIC of 23% and healthy fixed asset turnover ratio of 4.1x. Recent capital infusion into the business (~Rs 4100 crore) has enhanced the liquidity position of the company (virtually debt free). We build in revenue and earnings CAGR of 21% and 30%, respectively, in FY20-22E. We reiterate our HOLD rating on the stock with a target price of Rs 2360 (45.0x FY22E EV/EBITDA).
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