India Equity Research Retail May 8, 2021

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RESULT UPDATE

KEY DATA Rating HOLD Stable showing; covid overcasts outlook Sector relative Neutral Price (INR) 2,896 12 month price target (INR) 2,955 Avenue Supermarts (DMart) reported an in-line Q4FY21 performance Market cap (INR bn/USD bn) 1,876/25.6 with the marginal miss on gross margin made up by sustained cost Free float/Foreign ownership (%) 25.1/10.2 What’s Changed control. DMart Ready’s city count stayed constant this quarter with Target Price  Rating/Risk Rating ⚊ focus on deepening penetration in existing cities. Beyond Q4FY21 though, the second wave is causing an inventory pile-up, which can be QUICK TAKE a margin overhang and also clouds store expansion visibility. Above In line Below Profit  Factoring in the second wave’s impact, we are cutting FY22E EBITDA Margins  by 4% (FY23E unchanged), yielding a revised TP of INR2,955 (60x Revenue Growth  Q2FY23E EV/EBITDA). We retain ‘HOLD’. While covid remains a near- Overall  term overhang, the outlook beyond hinges on DMart keeping its EDLP moat intact while gaining traction in online share (Link). FINANCIALS (INR mn) Q4FY21 performance in line; DMart Ready city count unchanged Year to March FY20A FY21E FY22E FY23E DMart reported in-line revenue growth of 17% YoY (Q3FY21: 10% YoY). Gross margin Revenue 2,48,702 2,41,431 3,22,217 4,08,049 rose 120bps YoY to 14.4% (estimate: 14.8%), but is lower than the average of ~14.8% EBITDA 21,283 17,430 27,952 35,398 Adjusted profit 13,010 10,994 18,047 23,697 for the Q4 quarters of previous years. Management highlighted normalization of Diluted EPS (INR) 20.1 17.0 27.9 36.6 sales mix in Q4 until the onset of the second wave. Other expenses are flat YoY (QoQ EPS growth (%) 38.9 (15.5) 64.2 31.3 too) despite higher sales—DMart continues to maintain its cost structure to covid RoAE (%) 15.6 9.5 13.8 15.6 times, despite recovery exceeding the pre-pandemic level. Overall EBITDA margin P/E (x) 143.8 170.2 103.7 79.0 came in at 8.4% (Q4FY20: 6.7%, Q4 average: ~7.5%). It is better than past years owing EV/EBITDA (x) 87.9 106.8 66.4 52.2 Dividend yield (%) 0 0 0 0 to opex control. EBITDA came in at INR6.2bn, up 48% YoY. For FY21, DMart highlighted the share of General Merchandise and Apparel was 23% of revenue compared with 27.3% in FY20 in the previous year. Dmart Ready did not expand to PRICE PERFORMANCE any more cities, but presence in existing cities has deepened. 3,300 53,000 3,030 48,400 Second covid wave fallout: Inventory and store expansion at risk 2,760 43,800 In addition to the obvious impact on store operations (more than 80% stores 2,490 39,200 affected), the second covid wave is resulting in the following: i) Inventory: DMart is 2,220 34,600 1,950 30,000 sitting on excess inventory that it had built up in anticipation of normalization of May-20 Aug-20 Nov-20 Feb-21 May-21 business. That might have to be liquidated over next quarter. ii) Store expansion: DMART IN Equity Sensex Store opening pipeline for this year is uncertain given ongoing lockdowns.

Outlook and valuation: Uncertain times ahead; maintain ‘HOLD’ Explore: Factoring in the impact of second wave, we are adjusting performance expectations by cutting FY22E EBITDA by 4% while keeping FY23E’s intact. We are retaining the target multiple at 60x EV/EBITDA while rolling forward the valuation to Q2FY23, which yields a revised TP of INR2,955 (up from INR2,864). Retain ‘HOLD/SN’.

Financial model Podcast Financials Year to March Q4FY21 Q4FY20 % Change Q3FY21 % Change Net Revenue 73,031 62,559 16.7 74,327 (1.7) EBITDA 6,166 4,173 47.8 6,914 (10.8) Adjusted Profit 4,350 2,713 60.3 4,702 (7.5) Video Corporate access Diluted EPS (INR) 6.7 4.2 7.3

Nihal Mahesh Jham Abneesh Roy +91 (22) 6623 3352 +91 (22) 6620 3141 [email protected] [email protected]

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Financial Statements

Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Total operating income 2,48,702 2,41,431 3,22,217 4,08,049 Share capital 6,478 6,478 6,478 6,478 Gross profit 37,673 35,883 48,977 62,023 Reserves 1,04,320 1,15,314 1,33,360 1,57,057 Employee costs 4,561 5,366 5,735 7,263 Shareholders funds 1,10,797 1,21,791 1,39,838 1,63,535 Other expenses 6,064 7,430 8,055 10,609 Minority interest 5 5 5 5 EBITDA 21,283 17,430 27,952 35,398 Borrowings 37 37 37 37 Depreciation 3,744 4,142 4,574 5,071 Trade payables 4,335 4,505 5,390 6,636 Less: Interest expense 691 417 522 538 Other liabs & prov 3,357 3,357 3,357 3,357 Add: Other income 600 1,962 1,271 1,891 Total liabilities 1,20,762 1,32,037 1,51,085 1,76,150 Profit before tax 17,448 14,834 24,127 31,681 Net block 58,698 63,614 73,633 90,080 Prov for tax 4,438 3,840 6,080 7,983 Intangible assets 783 783 783 783 Less: Other adj 0 0 0 0 Capital WIP 3,644 4,000 4,800 5,000 Reported profit 13,010 10,994 18,047 23,697 Total fixed assets 63,124 68,396 79,215 95,863 Less: Excp.item (net) 0 0 0 0 Non current inv 0 0 0 0 Adjusted profit 13,010 10,994 18,047 23,697 Cash/cash equivalent 1,079 9,568 15,847 21,974 Diluted shares o/s 648 648 648 648 Sundry debtors 196 331 441 503 Adjusted diluted EPS 20.1 17.0 27.9 36.6 Loans & advances 1,091 1,200 1,200 1,200 DPS (INR) 0 0 0 0 Other assets 21,112 18,792 22,666 28,648 Tax rate (%) 25.4 25.9 25.2 25.2 Total assets 1,20,762 1,32,037 1,51,085 1,76,150

Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Store count 214.0 234.0 264.0 309.0 Reported profit 17,448 10,994 18,047 23,697 Store addition 38.0 20.0 30.0 45.0 Add: Depreciation 3,744 4,142 4,574 5,071 Retail space (mn sq ft) 7.8 8.7 10.1 12.1 Interest (net of tax) 691 2,379 1,793 2,429 EBITDA margin (%) 8.6 7.2 8.7 8.7 Others (395) 0 0 0 Net profit margin (%) 5.2 4.6 5.6 5.8 Less: Changes in WC (3,762) 2,860 (984) (2,676) Revenue growth (% YoY) 24.3 (2.9) 33.5 26.6 Operating cash flow 12,801 16,534 17,350 20,538 EBITDA growth (% YoY) 30.3 (18.1) 60.4 26.6 Less: Capex 17,122 8,356 14,300 20,450 Adj. profit growth (%) 44.2 (15.5) 64.2 31.3 Free cash flow (4,320) 8,178 3,050 88

Assumptions (%) Key Ratios Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E GDP (YoY %) 4.8 (6.0) 7.0 6.0 RoE (%) 15.6 9.5 13.8 15.6 Repo rate (%) 4.4 3.5 3.5 4.0 RoCE (%) 21.2 13.1 18.8 21.2 USD/INR (average) 70.7 75.0 73.0 72.0 Inventory days 31 34 27 27 SSSG (%) 10.9 (13.0) 20.0 15.0 Receivable days 1 0 0 0 COGS (%) 84.9 85.1 84.8 84.8 Payable days 8 8 7 6 Staff costs (%) 1.8 2.2 1.8 1.8 Working cap (% sales) 0 0 0 0 Other expense (%) 30.8 33.0 30.0 30.0 Gross debt/equity (x) 0 0 0 0 EBITDA margin (%) 4.7 5.4 4.7 4.7 Net debt/equity (x) 0 (0.1) (0.1) (0.1) Inventory days 8.6 7.2 8.7 8.7 Interest coverage (x) 25.4 31.9 44.8 56.4

Valuation Metrics Valuation Drivers Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Diluted P/E (x) 143.8 170.2 103.7 79.0 EPS growth (%) 38.9 (15.5) 64.2 31.3 Price/BV (x) 16.9 15.4 13.4 11.4 RoE (%) 15.6 9.5 13.8 15.6 EV/EBITDA (x) 87.9 106.8 66.4 52.2 EBITDA growth (%) 30.3 (18.1) 60.4 26.6 Dividend yield (%) 0 0 0 0 Payout ratio (%) 0 0 0 0

Source: Company and Edelweiss estimates

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Key highlights

(INR mn) Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Revenues 48,725 54,509 50,334 58,146 59,908 68,089 62,559 38,832 53,062 74,327 73,031 Revenue Growth YoY (%) 38.9 33.1 32.1 27.1 22.4 24.4 24.3 (33.2) (11.4) 9.2 16.7 EBITDA 3,896 4,533 3,765 5,968 5,176 5,967 4,173 1,118 3,295 6,914 6,166 EBITDA Growth YoY (%) 22.6 7.5 27.9 41.0 33.3 39.7 10.8 (81.3) (36.3) 15.9 47.8 Adjusted Profit 2,257 2,570 2,029 3,231 3,227 3,840 2,713 401 1,985 4,702 4,350 Adjusted PAT Growth YoY (%) 18.2 2.1 21.4 31.9 47.6 71.0 33.7 (87.6) (38.5) 22.5 60.3 Gross margins (%) 14.3 14.7 14.4 16.4 15.4 15.3 13.6 14.2 14.5 15.1 14.4 EBITDA margins (%) 8.0 8.3 7.5 10.3 8.6 8.8 6.7 2.9 6.2 9.3 8.4 Store Count (Nos.) 160 164 176 184 189 196 214 216 220 221 234 Store Area (mn. Sq. ft.) 5.1 5.3 5.9 6.3 6.5 7.0 7.8 8.0 8.2 8.2 8.8 Sq feet/Store 31,875 32,317 33,523 34,239 34,392 35,561 36,449 36,806 37,273 36,968 37,692 Revenue/Sq. ft. (annualised) 38,216 41,139 34,125 36,918 36,866 39,076 32,082 19,538 25,884 36,390 33,121 Revenue/Sq. ft. YoY (%) 14.4 10.5 9.7 1.2 (3.5) (5.0) (6.0) (47.1) (29.8) (6.9) 3.2 SSSG (%) NA NA NA NA NA NA NA NA NA NA NA Source: Company, Edelweiss Research

Business mix

% FY20 FY21 Foods 52.4 57.4 Non-Foods (FMCG) 20.3 19.7 General Merchandise & Apparel 27.3 22.9 Source: Company, Edelweiss Research

Operational summary

FY17 FY18 FY19 FY20 FY21 Total bill cuts (INR mn) 109 134 172 201 152 LTL growth (%) 21.2 14.2 17.8 10.9 -13.1 Retail area (Mn Sq.ft) 4.1 4.9 5.9 7.8 8.8 Revenue per Sq.ft - Company (INR) 31,120 32,719 35,647 32,879 27,306 Source: Company, Edelweiss Research

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Quarterly summary

Year to March Q4FY21 Q4FY20 % change Q3FY21 % change FY21E FY22E FY23E Net revenues 73,031 62,559 16.7 74,327 (1.7) 2,41,431 3,22,217 4,08,049 Raw materials 62,518 54,058 15.6 63,096 (0.9) 2,05,547 2,73,240 3,46,026 Gross Profit 10,514 8,501 23.7 11,231 (6.4) 35,883 48,977 62,023 Employee expenses 1,243 1,261 (1.4) 1,268 (1.9) 5,366 5,735 7,263 Other expenses 3,104 3,066 1.2 3,050 1.8 12,998 15,144 19,178 Total expenditure 4,348 4,328 0.5 4,317 0.7 18,453 21,025 26,625 EBITDA 6,166 4,173 47.8 6,914 (10.8) 17,430 27,952 35,398 D&A expense 946 1,046 (9.5) 1,003 (5.6) 4,142 4,574 5,071 EBIT 5,220 3,128 66.9 5,911 (11.7) 13,289 23,378 30,327 Less: Interest Expense 103 144 (28.3) 87 18.1 417 522 538 Add: Other income 526 349 50.8 492 6.8 1,962 1,271 1,891 Profit before tax 5,642 3,333 69.3 6,316 (10.7) 14,834 24,127 31,681 Less: Provision for Tax 1,293 620 108.6 1,614 (19.9) 3,840 6,080 7,983 Reported Profit 4,350 2,713 60.3 4,702 (7.5) 10,994 18,047 23,697 Adjusted Profit 4,350 2,713 60.3 4,702 (7.5) 10,994 18,047 23,697 No. of Diluted shares outstanding (mn) 648 648 0.0 648 0.0 648 648 648 Adjusted Diluted EPS 6.7 4.2 60.3 7.3 (7.5) 17.0 27.9 36.6

as % of net revenues Raw materials 85.6 86.4 (81) 84.9 71 85.1 84.8 84.8 Employee cost 1.7 2.0 (31) 1.7 (0) 2.2 1.8 1.8 Other expenses 4.3 4.9 (65) 4.1 15 5.4 4.7 4.7 EBITDA 8.4 6.7 177 9.3 (86) 7.2 8.7 8.7 Net profit 6.0 4.3 162 6.3 (37) 4.6 5.6 5.8 Source: Company, Edelweiss Research

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Company Description DMart is an emerging national supermarket chain with focus on value retailing. The company has been one of the largest and most profitable F&G retailers in India. It offers a wide range of products with focus on foods, non-foods (FMCG) and general merchandise & apparel product categories. In 2002, DMart opened its first store in Mumbai. As at September 2020, the company had 220 stores with retail business area of ~8.2mn sq ft. DMart operates and manages all its stores. The company operates predominantly on ownership basis (including long-term lease arrangements, where lease period is of more than 30 years and the building is owned by DMart) instead of rental model. It opens stores using cluster-based approach on the basis of adjacencies and focuses on efficient supply chain that targets densely-populated residential areas with a majority of lower-middle, middle and aspiring upper-middle class consumers. DMart’s distribution and packing centres form the backbone of its supply chain that supports its retail store network. Investment Theme DMart’s core MOAT has translated not only into strong revenue growth, but also robust profitability and return ratios. During FY12-17, DMart sustained consistent SSSG above the 20% print. However, that has come off since due to older stores maturing. The company’s competitive prices are derived from right product assortment, lower payable days, right location size and cluster-based store expansion, among others. Consequently, a strong SSSG helped DMart expand gross/EBITDA margins from 14.5%/6.4% in FY13 to 15.0%/8.2% in FY19. Key Risks Sustenance of EDLP program and increased competition. Purchase of real estate at favourable rates and hence the store expansion. This arrangement entails huge initial cash outflow, which may involve taking higher debt. In the scenario where new stores fail to pick up as anticipated, then incremental debt taken for same would need to be serviced from cash flows of other stores, which could impact overall profitability of business. Revenue concentration in largely from Western India – Maharashtra and Gujarat. Competition from e-commerce companies

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Additional Data Management Holdings – Top 10* CEO Ignatius Navil Noronha % Holding % Holding CFO Niladri Deb Bright Star Inv 13.70 Vanguard Group 0.68 SBI MF 4.21 Blackrock 0.62 COO Udaya Bhaskar Yarlagadda Axis AMC 2.76 GSAM 0.32 Group CFO Ramakant Baheti Capital Group 0.91 Robeco 0.27 Auditor S R B C & Co LLP ICICI Pru AMC 0.70 UTI AMC 0.27

*Latest public data

Recent Company Research Recent Sector Research Date Title Price Reco Date Name of Co./Sector Title Time to whet appetite for online; Growth outlook outshines 19-Mar-21 2967.55 Hold 30-Apr-21 Trent Company Update uncertainty; Result Update Covid blues behind; pushing online Structural surge; minor bumps 09-Jan-21 2967.55 Hold 29-Apr-21 Titan Company pedal; Result Update ahead; Result Update Stable show; sharpening e-com After stop-start, it’s stop again; 17-Oct-20 1983.6 Hold 08-Apr-21 Retail focus; Result Update Sector Update

Rating Interpretation Daily Volume 20 3300 TP 2,864 2865 16 TP 2,300

2430 12 (INR)

1995 TP (Mn) 1,639 8 TP TP 1560 1,2741,300 4 1125 May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 0 DMART IN Equity Buy Hold Reduce May-18 Nov-18 May-19 Nov-19 May-20 Nov-20

Source: Bloomberg, Edelweiss research Source: Bloomberg

Rating Distribution: Edelweiss Research Coverage Rating Rationale

Buy Hold Reduce Total Rating Expected absolute returns over 12 months

Rating Distribution* 164 59 19 243 Buy: >15%

>50bn >10bn and <50bn <10bn Total Hold: >15% and <-5%

Market Cap (INR) 197 53 3 253 Reduce: <-5% *1 stocks under review

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Aditya Narain Head of Research [email protected]

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