Hold Avenue Supermarts; target of Rs 3130: ICICI Direct
ICICI Direct recommended hold rating on Avenue Supermarts with a target price of Rs 3130 in its research report dated January 11, 2021.
January 14, 2021 / 09:03 PM IST
ICICI Direct's research report on Avenue Supermarts
D-Mart’s Q3FY21 results were above our and consensus estimates across all parameters. Driven by healthy surge in festive demand, revenue for Q3 grew 10.8% YoY to Rs 7542.0 crore (up 42% QoQ; I-direct estimate: Rs 7340 crore). While ‘food and FMCG’ category had already reverted to growth path with positive trajectory in September, discretionary consumption also picked up pace in the quarter. Some home usage categories like apparel, footwear and travel are still not completely out of the woods. Post festive season, the momentum decelerated, to a certain extent (owing to night curfews, weekend store closures), as two years and older D-Mart stores (162 out of 221 stores) saw ~4% YoY decline in December 2020. Gross margins improved marginally by 20 bps YoY to 15.5% but expanded 100 bps QoQ owing to recovery in sale of general merchandise. Agile opex management (other expenses & employee cost up 4% & 18% YoY, respectively) resulted in EBITDA margins expanding by 30 bps YoY to 9.1% (up 290 bps QoQ, I-direct estimate: 8.3%). EBITDA grew 15.5% YoY to Rs 689.1 crore (I-direct estimate: Rs 606 crore). Key highlight of the quarter was sustained expansion in its e-commerce operations (D-Mart Ready) to newer towns and pin codes.
Headwinds such as supply side constraints for non-FMCG segment, increase in raw material prices, store operation restrictions, may a have negative impact in the near term but we remain structurally positive on the company and its long term growth prospects. Robust liquidity position (QIP proceeds worth Rs 4078 crore) is expected to provide impetus to store addition pace (mainly from FY22E onwards). We revise our earnings estimates upwards and bake in revenue and earnings CAGR of 21% and 26%, respectively, in FY20-23E, with RoIC improving to 25% in FY23E. Given the sharp run-up in stock price, we reiterate our HOLD rating with a revised target price of Rs 3130 (50x FY23E EV/EBITDA, previous TP of Rs 2765).
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